He showed up in Hong Kong like a bomb-maker protesting the existence of conflict.
The rewards of obedience
Mahathir’s attacks on the multilateral institutions, and Malaysia’s belated, temporary reintroduction of capital controls in 1998, turned him into the ‘bad boy’ of the Asian financial crisis.68 The Thai government, by contrast, remained the star pupil of the IMF and World Bank. That Thailand has fallen farther than any other country in the region since the crisis is an unfortunate comment on this status. Thailand was also the country where the Asian financial crisis began.
Uniquely among south-east Asian states, Thailand was never colonised. None the less, the country has a long history of accepting bad advice. From the time of the Bowring Treaty with Britain in 1855 until 1926, Thailand was persuaded by British negotiators to run the lowest import tariff in Asia – just 3 per cent.

…

It turned out that too much of Brazil’s earlier growth had been generated by debt that did not translate into a more genuinely productive and competitive economy.
Beginning in 1997, with seven economies that have expanded at least 7 per cent a year for a quarter century – Japan, Korea, Taiwan, China, Malaysia, Indonesia and Thailand – east Asia entered a period of reckoning of its own, as the Asian financial crisis took hold. By this point Japan had long since become a mature economy that faced a new set of post-developmental structural problems, ones it showed much less capacity to address than the original challenge of becoming rich. Korea, Taiwan and China, however, were still in the developmental catch-up phase. These states were either unaffected by the Asian crisis or recovered quickly from it, and returned to brisk growth and technological progress.

…

It was a story of banks being captured by narrow, private sector interests whose aims were almost completely unaligned with those of national economic development. The process was one which has also been observed in Latin America and, more recently, in Russia. The detail of how financial liberalisation went wrong in south-east Asia is explored on a journey to Indonesia’s capital Jakarta, where a new financial district grew like a mushroom in the run-up to the Asian financial crisis.
The countries covered
I have made a number of simplifications in this book so as not to dilute its central messages and to enable its story to be told (endnotes excepted) in just over 200 pages. One of these involved choosing which east Asian countries to leave out of the narrative. Since the book is about developmental strategies that have achieved a modicum of success, the region’s failed states do not appear.

The optimism of the preceding boom inspired many Thais to begin borrowing heavily to buy real estate, creating a bubble that when pricked helped trigger the Asian financial crisis of 1997–98.
The same story unfolded in Malaysia, where at the peak of its boom in 1995, investment reached 43 percent of GDP, the second-highest level ever recorded in a large economy, behind only China today. Guided by the authoritarian and increasingly megalomaniacal hand of its then prime minister, Mahathir Mohamad, some of the investment proved useful in the end. The vast new international airport that Malaysia opened at the height of the Asian Financial Crisis in 1998, which was criticized as another example of vainglorious overspending, is no longer too big for current demand. But much of the investment unleashed by Mahathir went into grand visions—including a new tech city called Cyberjaya, and a new government administrative district called Putrajaya—that were in the end just unnecessary real estate projects.

…

A decade later I came to wish that I had internalized this message, as private debt grew rapidly in the United States and Europe in the run-up to the global financial crisis—a disaster that would make the Asian financial crisis look small by comparison. I didn’t listen to the chorus whispering, “Kiss of debt, kiss of debt . . .”
Over the last three decades, the world has been subjected to increasingly frequent financial crises, each one setting off a hunt for the clearest warning sign of when the financial mine is about to blow again. Every new crisis seemed to produce a new explanation for crises in general. The postmortems after Mexico’s “tequila crisis” of the mid-1990s focused on the dangers of short-term debt, because short-term bonds had started the meltdown that time. After the Asian financial crisis of 1997–98, it was all about the danger of borrowing heavily from foreigners, because foreigners had suddenly cut off lending to Thailand and Malaysia when their problems became clear.

…

The global expansion that began in 2009 is on track to be the weakest in post–World War II history. In 2007, just before the financial crisis hit, the pace of growth was slowing in only one emerging economy out of every twenty. By 2013, that ratio was four out of five, and this “synchronized slowdown” was in its third year, the longest in recent memory. It had carried on longer than the synchronized slowdowns that hit the emerging world after Mexico’s peso crisis in 1994, or the Asian financial crisis in 1998, or the dot-com bust in 2001 or even the crisis of 2008.4 As the sluggishness spread, the old hunt for the next emerging-world stars gave way to a realization: Economic growth is not a God-given right. Major regions of the world, including the Byzantine Empire and Europe before the Industrial Revolution, have gone through phases stretching hundreds of years with virtually no growth.

Once again, I had missed the bigger event unfolding just beyond the horizon.
I was hardly alone, of course. With very few exceptions economists were busy singing the praises of financial innovation instead of emphasizing the hazards created by the growth in what came to be known as the “shadow banking system,” a hub of unregulated finance. Just as in the Asian financial crisis, they had overlooked the danger signs and ignored the risks.
Neither of the crises should have come as a total surprise. The Asian financial crisis was followed by reams of analysis which in the end all boiled down to this: it is dangerous for a government to try to hold on to the value of its currency when financial capital is free to move in and out of a country. You could not have been an economist in good standing and not have known this, well before the Thai baht took its plunge in August 1997.

…

Quoted in Jonathan Kirshner, “Keynes, Capital Mobility and the Crisis of Embedded Liberalism,” Review of International Political Economy, vol. 6, no. 3 (Autumn 1999), pp. 313–37.
9 Dani Rodrik, “Governing the World Economy: Does One Architectural Style Fit All?” in Susan Collins and Robert Lawrence, eds., Brookings Trade Forum: 1999 (Washington, DC: Brookings Institution, 2000).
10 For an elaboration of the Sachs argument, see Steven Radelet and Jeffrey Sachs, “The Onset of the East Asian Financial Crisis.” in Paul Krugman, ed., Currency Crises, (Chicago: University of Chicago Press for the NBER, 2000). The story of the Asian financial crisis and the debates around it is well told in Paul Blustein, The Chastening: Inside the Crisis That Rocked the Global System and Humbled the IMF (New York: Public Affairs, 2001).
11 Arthur I. Bloomfield, “Postwar Control of International Capital Movements,” American Economic Review, vol. 36, no. 2, Papers and Proceedings of the Fifty-eighth Annual Meeting of the American Economic Association (May 1946), p. 687.
12 John Maynard Keynes, “Activities 1941–1946: Shaping the Post-war World, Bretton Woods and Reparations,” in D.

…

These countries had been growing rapidly for decades and had become the darlings of the international financial community and development experts. But all of a sudden international banks and investors decided they were no longer safe places to leave their money in. A precipitous withdrawal of funds ensued, currencies took a nose-dive, corporations and banks found themselves bankrupt, and the economies of the region collapsed. Thus was born the Asian financial crisis, which spread first to Russia, then to Brazil, and eventually to Argentina, bringing down with it Long-Term Capital Management (LTCM), the formidable and much-admired hedge fund, along the way.
I might have congratulated myself for my prescience and timing. My book eventually became a top seller for its publisher, the Washington-based Institute for International Economics (IIE), in part, I suppose, because of the IIE’s reputation as a staunch advocate for globalization.

Hurricane Katrina, for example, was
one of the most fully predictable and scenario-tested natural disasters in American history, but that fact still did not lead to appropriate preparatory actions
or adequate crisis responses on the part of responsible officials at the local,
state, or federal levels.
The following section, “Cases: Looking Back,” looks more closely at some
historical examples of surprise—upside as well as downside—and asks why the
social and economic impacts of emergent technologies and events like the collapse of the former Soviet Union and the 1997–98 Asian financial crisis were
not anticipated. David Landes, Bruce Berkowitz, and David Hale draw on their
knowledge of history and policy to pinpoint those institutional, and not just
personal, failures that prevented policymakers and others from properly anticipating major events of the time.
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The third section discusses potential future cases of surprise.

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But acknowledging when intelligence is successful is equally important. So too is appreciating the differences between an intelligence failure and
policy frailties whose sources lie elsewhere. Without an understanding that
such things can happen, we are certain to be blindsided in the future.
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Econoshocks:
The East Asian
Crisis Case
David Hale
T
he East Asian financial crisis of 1997–98 was one of the most dramatic
economic events of the twentieth century. A region that had enjoyed several
years of robust economic growth was suddenly plunged into a financial crisis
that produced widespread bankruptcies and sharply higher unemployment.
The crisis brought down one of Asia’s oldest dictators, Indonesia’s Suharto, and
helped to topple a democratically elected government in Thailand.

…

The bank problems would constrain the ability of central banks to
tighten monetary policy and thus set the stage for currency depreciation. They
found that such crises tended to be more severe in developing countries than
in industrial ones. One of the best examples of such a crisis was Chile in 1983,
but they found similar examples in Argentina (1981), Brazil (1987), Colombia
(1983), Finland (1983), Mexico (1994), Peru (1985), and Turkey (1984).
Despite this evidence, on the eve of the East Asian financial crisis few
believed that the region was vulnerable to major financial shocks. East Asian
countries, after all, had but modest budget deficits and generally low infla-
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tion. The Reinhart-Kaminsky paper therefore did not produce much discussion in East Asia because most of the crises they reviewed had been in Latin
America, and East Asia was free of Latin America’s problems with large fiscal
deficits.

The main downside with such a strategy is that the savings which have underpinned China’s huge level of investment might be undermined as savers go abroad in search of rates of return far in excess of the paltry levels they can find at home, thereby denying the country the funds for investment that it has hitherto enjoyed, with the inevitable consequence that the growth rate would decline. In addition, a floating renminbi would be vulnerable to the kind of speculative attack suffered by the Korean won, Thai baht and Indonesian rupiah in the Asian financial crisis.43 Although Zhu Rongji, the then Chinese premier, intended to begin the liberalization of the capital account in 2000, the Asian financial crisis persuaded him that such a change would be imprudent. The present global financial turmoil only goes to confirm the wisdom of the Chinese leadership in continuing to regulate the capital account, despite persistent calls from the West to deregulate. In due course, a gradual liberalization could well be initiated, indeed there are already clear signs of this, but the Chinese government is aware that the existing system provides the economy with a crucial firewall, especially given its open character and consequent exposure to external events.44
Whatever the consequences of the global recession, there are powerful reasons for believing that the present growth model is unsustainable in the long run, and probably even in the medium term.

…

The marginalization of the US is also manifest in the Chiang Mai Initiative, first agreed in 2000 on the proposal of the Chinese,37 which involves bilateral currency swap arrangements between the ASEAN countries, China, Japan and South Korea, thereby enabling East Asian countries to support a regional currency that finds itself under attack. The agreement was a direct product of the Japanese proposal for an Asian Monetary Fund during the Asian financial crisis,38 which was strongly opposed at the time by both the United States (on the grounds that it would undermine the IMF) and China (because it came from Japan). China has since swallowed its opposition - no doubt in large part due to the strengthening position of the renminbi - while the United States, weakened by the IMF debacle in the Asian financial crisis, has not resisted.39
If ASEAN has provided the canvas, it is the diplomatic involvement and initiative of China that has actually redrawn the East Asian landscape. In effect, China has been searching out ways in which it might emerge as the regional leader.40 Underpinning its growing influence has been the transformation in its economic power.

…

With China’s growing economic power, the greatest single threat to the United States’ global economic pre-eminence, apart from its own decline, lies in China’s attitude towards the international system.174 Since Deng Xiaoping decided that the country’s interests would be best served by seeking admission to it, China has become an integral part of the international system, but China’s attitude towards it will not necessarily always remain unambiguously supportive.175
Take the IMF, for example, of which China is a member. During the Asian financial crisis, Malaysia and Japan proposed that there should be an Asian Monetary Fund, such was the level of dissatisfaction within the region about the role of the IMF. This was strongly opposed by both the US and the IMF, which correctly saw the proposal as a threat to the IMF’s position, and also by China, which was concerned that it had emanated from Japan. China has since abandoned its opposition and is now exploring with others in the region the possibility of creating such a fund. Any such body would undoubtedly have the effect of seriously weakening the role of the IMF. In the event of another Asian financial crisis, it is likely that a regional financial solution would play a much bigger role than was the case before.

The consistent bias of national
protectionism in all its guises was the subordination of finance to industry,
the proclamation of the importance of production.
Since the 1970s, the re-emergence of financial crises has been accompanied by
a revival in national protectionism, but in a much weaker form than in the 1930s.
74
Andrew Gamble
In general, the territorial conception of world order has been less influential than
in some earlier periods (Gamble and Payne 1996). It retains considerable power,
however, as shown in the Asian financial crisis, when several states responded to
the serious situation facing them by reasserting their national sovereignty.
Malaysia, in particular, sought to insulate its economy from external pressures,
resorting to exchange controls amongst other measures. But despite the extreme
nature of the financial crisis which engulfed many economies in East Asia, as well
as subsequently in Latin America, there was no general retreat to protectionism and
the crisis measures proved temporary; states have sought to negotiate their way
back into the global economy.

…

Many have constantly predicted the eruption of a major financial crisis
which will finally destroy the political basis for the continuance of the post-1945
liberal economic order in the same way that the 1929–31 crisis finally destroyed
the nineteenth-century liberal economic order. But it has not so far happened and
the liberal economic order has even survived its greatest test so far, the Asian
financial crisis.
Territorial order, however, remains an indispensable characteristic of the contemporary world order, because of the continuing importance and relevance of
national jurisdictions within it. In moments of extreme crisis in the system, the
possibility of a resort to national jurisdictions and national sovereignty remains
a possibility. That it has not so far happened is testament to the material, institutional and ideological strength of two other conceptions of world order.

…

The debate reached its peak in the 1980s when the
contrast was between the market led Anglo-American model and the state-led or
trust-based models of Germany and Japan. For a time decline fever which had
long afflicted Britain gripped the United States and the superiority of the German
and particularly the Japanese models of capitalism were much trumpeted. But the
roles were reversed in the 1990s and the century ended with the Anglo-American
model apparently back on top. The Asian financial crisis was one of the most
significant events in promoting this reversal.
It raised the question of whether the different models that flourished in the
decades since 1945 were the product of the era of national protectionism and US
hegemony in the global economy and has gradually been undermined as the logic
of the global capitalist economy has reasserted itself. In this view, a particular
phase of capitalist development has ended and the space for certain models of
capitalism has disappeared with it.

The China scholar Yukon Huang argues that spatial balance “was an obsession of planners in the former Soviet Union” and a prime objective of leaders in Egypt, Brazil, India, Indonesia, Mexico, Nigeria, South Africa, and other developing nations. Huang says Deng was virtually alone in his understanding that rising regional inequality was a necessary political risk, at least in the short term. He also clearly knew that the boom in these coastal zones would serve as a magnet to rural migrants.
The congress in 1997 coincided with the onset of the Asian financial crisis and the collapse of currencies across the region. As falling global demand idled plants around the country, Beijing began to downsize bloated state factories, laying off tens of millions, and sold many small state firms to private owners. It also privatized the real estate sector, allowing individual property ownership for the first time. The sight of the Communist Party slashing state jobs and bankrolling the rise of a home-owning bourgeoisie showed that communism as Mao knew it was truly finished.

…

That’s a big reason why the value of Brazil’s stock market rose 300 percent in dollar terms from 2000 to 2010, more than triple the rise in China’s market, despite Brazil’s slower economic growth.
In this respect at least, Brazil represents a positive turn in emerging markets. Stock markets should rise in value when the economy is growing, but in recent decades in the emerging world, they often have not. A case in point was South Korea, where the benchmark KOSPI index peaked in 1989, while the economy continued to grow at a 6 percent pace until the outbreak of the Asian financial crisis in 1997. Companies saw the stock market as a place to raise quick money, not as a basic measure of the company’s long-term value. Emerging-market companies focused on getting big—more employees, more sales, more market share—and didn’t pay much attention to whether all that revenue was generating bottom-line profit, the metric stock market investors care about most. In recent years with a few glaring exceptions, such as China, that has begun to change: as companies from Brazil to South Korea have started to refocus on profit, stock markets have started to rise (and fall) with emerging economies.

…

South Korea, with a GDP of $1.1 trillion and a population of forty-eight million, is twice the size of Taiwan ($505 billion and twenty-three million) and is pulling away as a competitive force: in 2006 the total value of the South Korean stock market surpassed Taiwan’s for the first time, and it is now considerably larger, at $1 trillion versus $700 billion. Intriguingly, the family dynasties that still dominate the top-thirty Korean companies, and that were widely seen as the heart of a severe “crony capitalism” problem at the depths of the Asian financial crisis in 1998, have reformed so dramatically that they are now a core strength for the local economy. Hyundai, spoofed a decade ago for its authoritarian management style, impenetrable bookkeeping, and laughably bad cars, is now a world-beater. Taiwan, meanwhile, sticks to the narrow niche of banging out goods sold under the “made in” label of other countries. And while both gold medalists are the richer halves of divided nations, Taiwan has little to gain from the distant prospect of reunification with the much-larger Chinese mainland, while South Korea is already preparing to adopt the well-disciplined workforce of North Korea, which could fail at any moment.

In this situation, borrowing in U.S. dollars only increased the vulnerability—fears that a country is in trouble can become self-fulfilling as foreign bankers and bondholders scramble to pull their money out first, triggering the defaults that they were afraid of.
For the first nine months of 1997, the Korean economy grew at an impressive rate of around 6 percent.14 In July, however, the “Asian financial crisis” broke out in Thailand as a crisis of confidence caused a collapse in the local currency, the baht. Overleveraged companies saw their debts double practically overnight (because their debts were in foreign currencies, the amount they owed doubled when the value of the Thai baht fell by half) and were forced to default, causing mass bankruptcies and layoffs. One month later, the crisis spread to Indonesia, where the currency collapsed and domestic companies failed.

…

Peter Orszag, Clinton economic adviser and director of Rubin’s Hamilton Project, became head of the Office of Management and Budget; Gary Gensler, treasury undersecretary for domestic finance under Summers (and former Goldman partner), became head of the CFTC; Mary Schapiro, first head of the CFTC under Clinton and later head of the Financial Industry Regulatory Authority, the financial industry’s chief self-regulatory body, became head of the SEC; Neal Wolin, treasury deputy counsel and general counsel under Rubin and Summers, became deputy treasury secretary; Michael Barr, special assistant and deputy assistant secretary in the Rubin Treasury, became assistant secretary for financial institutions; Jason Furman, director of the Hamilton Project after Orszag, became deputy director of the NEC; and David Lipton, treasury undersecretary for international affairs during the Asian financial crisis and later Citigroup executive, also became one of Summers’s deputies at the NEC. Even President Obama’s chief of staff, Rahm Emanuel, had a similar background, having worked both as a Clinton adviser and as an investment banker at Wasserstein Perella.
Geithner’s counselors as treasury secretary included Lee Sachs from the Clinton Treasury (and most recently a New York hedge fund) and Gene Sperling, Rubin’s successor as director of the NEC (and most recently a highly paid adviser to a Goldman Sachs philanthropic project).

But it is impossible to look back at the developments of the past three decades without concluding that, notwithstanding the failures and disappointments, the general direction has been towards more accountable governments, more market-oriented economies, and so towards more cooperative and positive-sum relations among states.11 The creation of the World Trade Organization in 1996 is just one, albeit particularly important, sign of these fundamentally hopeful developments.
Yet much has also gone wrong. During the 1990s, and particularly during the Asian financial crisis of 1997–98, I became concerned that the liberalization of the 1980s and 1990s had brought forth a monster: a financial sector able to devour economies from within. I expressed those concerns in columns for the Financial Times written in response. This suspicion has hardened into something close to a certainty since 2007. Connected to this is concern about the implications of ever-rising levels of debt, particularly in the private sector, and, beyond that, what is beginning to look like chronically weak demand, at the global level.

…

If the financial and monetary authorities managed to sustain the pegged exchange rate, despite the depression, adjustment would then occur via falling nominal wages and prices (what the Eurozone calls ‘internal devaluation’), emigration and a write-down of the bad debt of insolvent banks, non-financial companies, households and possibly even the government. In time, with competitiveness restored and debt restructured, the economy would recover. This used to happen in the nineteenth century. It has happened, more recently, in small open economies, such as Hong Kong after the Asian financial crisis and the Baltic states after the crises that began in in 2007. This is, in effect, the old gold-standard mechanism.
If, however, the authorities let the peg go, the adjustment would be accompanied by a depreciation of the nominal exchange rate. That would obviate debt deflation and the need to cut nominal wages and prices. It is likely, though not certain, that the result would be a swifter and less painful adjustment, without a tidal wave of defaults.

…

The latter have suffered huge financial crises, big recessions, and correspondingly large rises in fiscal deficits and debt. This is the sort of picture we used to see in emerging and developing countries: one crisis came on the heels of another, notably the Latin American debt crisis of the 1980s, the ‘Tequila crisis’ in Mexico and then other Latin American countries in the mid-1990s, the Asian financial crisis of 1997–98, and the crises in Russia (1998), Brazil (1998–99) and Argentina (2000–01). But emerging countries suffered far fewer banking crises in the 2000s than in the 1980s and 1990s, largely because few had experienced big credit booms in the earlier 2000s. That left them in a good position to expand domestic credit in response to the crises of 2008 and 2009. Thereupon, after the immediate collapse in external demand was over, they mostly tightened credit again.

I want to talk about two recent crises that have something to teach us. One of them is the Asian financial crisis in 1997–98, and the other is the Argentina economic meltdown in December 2001.
In The Shock Doctrine, I have a chapter about the Asian financial crisis. It’s called “Let it Burn,” and the reason why it’s called that is because the very same banks that have been so anxious to get bailouts from U.S. taxpayers at the time were saying that what Asia needed—this is a quote—“what Asia needs is more pain.” Because, of course, Citibank, Goldman, Morgan Stanley, went into Asia after the crisis reached bottom and bought up the crown jewels of the Asian tiger economies. What I want to read you from the book is something Alan Greenspan said at the time. He said that what he thought was being witnessed with the Asian financial crisis was “a very dramatic event towards a consensus of the type of market system which we have in this country,” this country being America.

…

It would be better if we got it right the first time, but that is expecting too much of this president and his administration. View from Asia
WA L D E N B E L L O
September 24, 2008
Manila
Many Asians absorb what is happening in Wall Street with a combination of déjà vu, skepticism and “I-told-you-so.”
For many, the Wall Street crisis is a replay, though on a much larger scale, of the 1997 Asian financial crisis, which brought down the red-hot “tiger economies” of the East. The shocking absence of Wall Street regulation brings back awful memories of the elimination of capital controls by East Asian governments, which were under pressure from the International Monetary Fund and the U.S. Treasury Department. That move triggered a tsunami of speculative capital onto Asian markets that sharply receded after sky-high land and stock prices came tumbling down.

…

The markets would do the job instead—and if other governments did not like the new risks, tough.
For a long time, it looked as though private markets could step into the breach—recycling first petrodollars in the 1970s and then Asian dollars back into the global system. Floating exchange rates were volatile, but instruments like markets in future exchange rates emerged to manage new risks. There might be serious ruptures, like the 1980s Latin American debt crisis or the 1990s Asian financial crisis when private markets took fright, but basically governments could step away from global economic management. The U.S. could have guns, butter and allow its great multinationals and banks to expand abroad willy-nilly—and the markets would manage the implications spontaneously, finding the capital the U.S. needed with no constraint on either its government or financial system.
Now we know they cannot.

When the United States and Europe were hit by their own financial crises in 2008, it was well noted in Asia that the policies pursued seemed to be the exact opposite of those urged on Asia a decade earlier—interest rates were slashed, banks were bailed out, governments indulged in massive deficit spending.
A second major consequence of the Asian financial crisis was that it encouraged countries in the region to build up huge foreign reserves to give themselves defenses against future waves of speculation. By 2008, when the global financial crisis hit, China’s reserves alone were almost $2 trillion. Cash piles of that sort gave Asian policy makers a huge boost in confidence when dealing with their Western counterparts.
Finally, the Asian financial crisis hastened a transfer of power within the Asian continent itself. The countries that were affected worst were Thailand, Indonesia, and South Korea, and the fallout extended to other Southeast Asian tigers such as Singapore and Malaysia.

…

And yet, for all that, Japan was still a nation comfortable with the prevailing international system. The years of rapid growth had gone, but Japan remained a wealthy and orderly country, the second-largest economy in the world throughout the period, a title only ceded to China in 2010. As America’s closest Asian ally, Japan was comfortable with the “unipolar moment.” And, as a major exporting power, Japan had little reason to question the merits of globalization.
The Asian financial crisis of 1997–98 gave some of Japan’s neighbors much more reason to ask fundamental questions about how the international capitalist system was working. In a sequence of frightening events that prefigured the global financial crisis of 2008, a series of Asian economies were hit by capital flight, collapsing currencies, defaulting loans, folding businesses, and, finally, catastrophic-sounding collapses in economic output.

…

Their economies slowed but they did not tip into recession. The first part of the Asian story had been about the rise of Japan in the postwar era. Then came the first Asian tigers—South Korea, Taiwan, and Singapore. By the time I moved to Bangkok in 1992, the action had shifted to Southeast Asia. Thailand for a time was the fastest growing economy in the world. Growth did return to Thailand and Southeast Asia, after the Asian financial crisis, but the world’s attention had moved on. By 1999, it was clear that the really world-shaking developments were taking place in China and India.
As the citizen of a Southeast Asian nation, Kishore Mahbubani could have regarded this as a worrying development. Instead he chose to rejoice in the rise of Asia as a continent. For Mahbubani, the biggest worries concerned the West. Would the United States have the wisdom to welcome China’s “peaceful rise”?

The developing world uses capital from rich countries to sustain the consumption of its population while it builds up its capital stock.
The world economy has never fit this textbook story very well, but there were periods, such as the early and mid-1990s, when capital flowed from rich countries to developing countries. The United States in these years ran a trade deficit, but a relatively modest one. This situation changed with the onset of the East Asian financial crisis of 1997, when investors pulled money not only out of East Asia but from the developing world as a whole. The dollar soared in value against the currencies of the countries in the region, partly because the countries needed to export more to repay money borrowed to get through the crisis, but partly because they wanted to accumulate massive amounts of foreign exchange to protect themselves against future crises.

…

A drop in the dollar by 10 percent against other currencies is equivalent to a 10 percent increase in the productivity of the U.S. economy, assuming no offsetting increase in wages. This swamps any plausible increase in productivity even with a very effective program of improved education and infrastructure.
The drop in the dollar from its peak in the last decade has brought the non-oil trade deficit almost down to where it was before the run-up in the dollar in the late 1990s.[40] In 1996, before the East Asian financial crisis sent the dollar soaring, the non-oil deficit was less than 0.3 percent of GDP. It peaked at 3.7 percent of GDP in 2004, three years after the peak of the dollar, and had fallen back to 0.8 percent of GDP in 2012, following the dollar back to its former level.
But counting oil, for which the United States paid far more in 2012 than it did in 1997, the trade deficit is still large. In textbook economics the higher price of oil imports should lead to a further decline in the value of the dollar, as increased exports and reduced imports of non-oil products offset the impact of higher oil prices.

…

Instead, we should have a policy focused on getting the trade deficit closer to balance.
While there are many policies, such as improving education and infrastructure, that will increase the economy’s productivity, even in a best-case scenario these strategies can have only a marginal impact on the trade balance in the near term. The trade deficit was relatively modest until the late 1990s, when the East Asian financial crisis led to a run-up in the value of the dollar. While the dollar has since reversed much of this gain, it needs to fall still further. Lowering the value of the dollar is not a difficult task economically; the problem is political. Powerful domestic interest groups benefit from an overvalued dollar, and getting it down to a level consistent with more balanced trade will mean overcoming the opposition of these special interests

But his words were so emphatic that listeners later were stunned by his subsequent actions.
As Lehman’s problems deepened, the Treasury secretary’s style occasionally brought him into conflict with Geithner, his partner in managing the crisis. Geithner’s approach — at least when he was at the New York Fed — was more disciplined, calmer, and politically savvy. A veteran of the U.S. Treasury’s management of the Asian financial crisis of the 1990s, Geithner had learned at the side of Clinton’s agile Treasury secretary, Bob Rubin. Rubin placed a high premium on what his then-deputy Lawrence Summers called “preserving optionality” — deferring final decisions until they had to be made and avoiding any public statement that could limit his political wiggle room. Rubin prized flexibility, and so did Geithner. That made sense in an ever-changing panic, but this approach risked turning crisis management into a series of ad hoc decisions that left everyone from traders in the markets to politicians in Congress guessing at the rules of the game.

…

The result was lower unemployment without higher inflation — and a technology stock market bubble for which Greenspan got substantial blame. But even after that bubble burst, and a recession ensued, the Greenspan Fed managed to get the economy going again by aggressively cutting interest rates — and the United States avoided the misery that followed the bursting of a real estate and stock market bubble in Japan.
Bush was right. Greenspan was a rock star — at least at that moment. He had steered the U.S. economy around the Asian financial crisis in 1998, two wars with Iraq, and the September 11 attacks. To economists, bond traders, and businessmen, he was a hero. “No one has yet credited Alan Greenspan with the fall of the Soviet Union or the rise of the Boston Red Sox, although both may come in time as the legend grows,” Princeton’s Alan Blinder, a former Fed vice chairman, and Ricardo Reis wrote in a 2005 evaluation of Greenspan that pronounced him “amazingly successful.”

…

Translation: Lenders were more willing to lend because they share with the investors the risk that borrowers wouldn’t repay. Derivatives allowed investors to hedge their bets, making them comfortable with positions they might once have shunned. Hedge funds and other huge pools of capital reduced volatility by pouncing when markets push an asset price even slightly out of line.
That was all to the good, but recalling the 1987 stock market crash and the 1998 Asian financial crisis, Summers observed presciently: “Some of the same innovations that contribute to risk spreading in normal times can become sources of instability following shocks to the system as large-scale liquidations take place.” (Translation: Everyone was counting on always being able to quickly sell any newfangled financial instrument.) Normally, that made sense. But if something bad happened, and everyone tried to sell at once — look out!

This prompted a period of rapid and in many cases injudicious growth in lending, which ultimately led to the collapse of a number of “second-tier” financial institutions (including several banks owned by Australian state governments) and “near-death” experiences for two of the four major banks in the early 1990s. These experiences, together with some subsequent smaller ones (including those arising from the Asian financial crisis later in the decade), imparted a greater degree of caution on the part of Australian bank managers than turned out to be the case in the United States or Britain.
Australian banks were also arguably under less pressure than their peers in other countries to adopt lower credit standards in pursuit of higher shareholder returns. Nor was there as much pressure to add riskier but higher-yielding assets to their securities portfolios, because they were achieving improvements in profitability from the consumer and funds management sides of their businesses.

…

Australia’s relatively mild experience with the downturn in international trade was also aided by a decline of more than 25 percent in the trade-weighted value of the Australian dollar between mid-2008 and the first few months of 2009, although this decline has since been more than entirely reversed. This echoed the role that large swings in the value of the Australian dollar had in cushioning the impact of the Asian financial crisis on Australia’s trade in the 1990s.
There is little doubt that if China’s response to the downturn in its economy had been less effective, Australia’s experience with the financial crisis would have been less benign. It also follows that if China were to experience a more sustained downturn at some point in the future, the impact on Australia may be greater than that of the North Atlantic financial crisis turned out to be.

…

If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive.”1
Since the idea required a drastic change in global tax regimes and went against the idea of free markets, particularly the drive toward frictionless financial markets, the proposed tax was never adopted or considered seriously in official circles. Most economists, international banks, and governments do not like the idea of the Tobin tax proposal because they feel that it would be difficult to implement and may even add instability to foreign exchange markets.
The Recent Financial Crises Have Renewed Interest in the Tax
When currency speculation became controversial again during the 1997–1999 Asian financial crisis, the idea of a Tobin tax was revived as part of the antiglobalization movement. Again, the idea was deemed by the official Group of Eight (G-8) circles as not worth considering. The idea went against the grain of the free market ideology, which advocates liberalizing financial markets and encourages the free flow of capital. After all, booming financial markets in the early 2000s seemed to confirm that the ideology worked well in creating limitless prosperity.

I was also skeptical about the wisdom of protecting investors from such turmoil. I asked a Fed governor that fall: should the Fed repeatedly intervene when the market was in trouble? Well, I remember her answering, it’s a central bank’s duty to act when the financial system is threatened.
In the following decades, I saw a fiscal crisis convulse interest rates and the dollar in my native Canada, an exchange rate crisis erupt in Europe in 1992, the Asian financial crisis, the near failure of Long-Term Capital Management in 1998, and then the rise and fall of the technology bubble. By 2007, I was looking for the next crisis everywhere: in home prices, leveraged buyouts, the trade deficit. I was not, however, looking for catastrophe. I had by now developed a deep respect for the authorities’ ability to counteract mayhem; I assumed that the economy, though it might get bumped around a bit, would come out okay.

…

As the coming chapters will show, the most important factor was the sense of safety that resulted from years of successfully fighting crisis and recession.
The twenty-five years before the global financial crisis were unusually peaceful for the economy; recessions were rare and mild, inflation was low and stable, and periodic financial crises, whether the stock market crash of 1987 or the Asian financial crisis of 1997, were contained by the global fire brigades—the Fed, the Treasury, and the International Monetary Fund. Economists called this era the “Great Moderation,” and credited it to changes in how businesses operated—using fewer inventories, for example—and a more disciplined, more nimble Federal Reserve, able to snuff out both inflation and recession. The global economy in 2008 was like a forest that hadn’t burned in decades; it was choking with the fuel of leverage, risk, and complacency.

…

Brady hatched a plan that would let them convert their loans to bonds, and then sell them to investors. The Brady bond program was a crucial step back toward health for America’s big banks. It also gave birth to the emerging market bond industry. As a result, emerging economies would henceforth borrow not from banks, with the attendant risks to banks’ solvency, but from the capital markets. This didn’t eliminate sovereign debt crises such as the Asian financial crisis, but it made them less likely to be a threat to America’s financial system; American banks’ exposure to Mexico in 1994, and East Asia in 1997, was far smaller than in 1982.
A similar feat was accomplished with securitization. Banks had always been able to sell individual loans, usually to other banks. But starting in the 1970s Lewis Ranieri of Salomon Brothers hit upon the idea of packaging many mortgages, and later credit card receivables or auto loans, together into a single “mortgage-backed security” (MBS) or “asset-backed security” (ABS) and selling it to investors just like a corporate bond.

Researchers at the World Bank estimate that upward of 150 million people have been lifted above the extreme poverty line because of social protection and safety net programs.9
Indonesia provides a good example of these forces. Today it is the world’s fourth most populous country, with 250 million people. Poverty began to fall in the 1970s, and continued to do so through the mid-1990s until the Asian financial crisis erupted in 1997. At that point, the number of extreme poor rose for about three years, but it has been falling ever since. Like so many other countries, Indonesia’s poverty reduction was ignited in the rural areas. The government introduced deliberate strategies to support agriculture, including distributing new varieties of seeds and fertilizers as part of the Green Revolution, ensuring favorable prices for small rice farmers, and building an extensive network of rural roads to connect markets.

…

During the Great Depression, critics in the United States on both the left and right assailed the economic meltdown as a consequence of failed democracy, and pointed to Italy and the Soviet Union as examples of the superiority of illiberal systems. In the 1950s and 1960s, the Soviet Union was seen as an economic juggernaut that was sure to outperform the West, just as China is seen today.
During my years in Indonesia, I regularly heard the story that people wanted development, and they didn’t care much about democracy. But when the Asian financial crisis erupted in 1997, citizens seized the opportunity to rise up, at great personal risk, and throw out Suharto. It turned out, contrary to the old argument, that Indonesians cared a lot about personal freedoms and holding their leaders accountable. They had just been afraid to say so. They didn’t see a trade-off: they wanted both democracy and development. Today that’s what they’re getting, as they are well into more than a decade of vibrant (imperfect) democracy alongside rapid (imperfect) development.

…

The government, and a few select cronies, maintained strict control over oil, gas, gold, tin, timber, and other mineral resources, but it created more extensive opportunities in agriculture and manufacturing. Suharto’s government followed the lead of South Korea, Taiwan, Thailand, and Singapore by stimulating economic growth while imposing firm political control. It was only in the late 1990s, with the threat of Communism (and unquestioned US support) waning and the Asian financial crisis exploding, that Suharto fell and Indonesian democracy took root.
Indonesia is just one example. The details of the story lines differ across other developing countries, but the themes are similar. Most of today’s developing countries were under some kind of colonial rule until a few decades ago, and had been for a century or more. Those not under colonial controls were under local rule that often was similarly brutal, with a small ruling group extracting resources from the broader population, such as in imperial China.

A large body of American opinion supported this development, and was mostly uncriticized by mainstream economists and the media.
The acquiescence to ideology occurred even when markets lurched from financial crisis to crisis under Greenspan’s tenure—a stock market crash in 1987, a thrifts crisis in 1989, the collapse of junk bonds by 1990, a derivatives crisis in 1994, the Mexican peso collapse of 1994, the Asian financial crisis of 1997, the failure of Long-Term Capital Management and the Russian default on debt in 1998, and the severe stock market crash of 2000.
Speculative binges enabled by both stimulative monetary policy and regulatory neglect preceded all these collapses. Levels of speculation rose to ever more dangerous heights each time. In the 1980s, the takeover movement built on soaring levels of debt, much of it ultimately bad, rose to unmanageable levels.

…

When Russia, its citizens increasingly refusing to pay taxes, defaulted in 1998, Soros’s funds (by then he had opened more funds) lost up to $2 billion in direct Russian investments and another $2 billion on the Russian ruble. The Russian investment was driven more by Soros’s political views than by his financial acumen.
The year before, however, Soros made hundreds of millions of dollars in the Asian financial crisis by selling Asian currencies in much the same way he sold the British pound. The Asian currencies had pegged their levels to the U.S. dollar, and held the peg far too long. The nations attracted an enormous amount of capital because they paid high interest rates, but ultimately the lid would burst, Soros felt. In one day, for example, the Thai baht fell 16 percent. The Malaysian ringgit also fell rapidly.

…

There was too much money chasing the same investments. Secrecy was at the core of Meriwether’s strategies; the price advantages were small, and if competitors knew them, the advantages disappeared quickly. Many were trying to find out what LTCM was doing and copying it outright, exactly as some hedge fund managers and others on Wall Street tried to emulate Soros and Paul Tudor Jones. In 1997, the financial devastation created by the Asian financial crisis also took its toll and LTCM made only 17 percent on its capital that year, its historical relationships no longer holding. In 1997, by contrast, the S&P 500 was up 31 percent as high-technology stocks were taking off.
In early 1998, LTCM decided to give a large portion of its capital back to its original investors because profitable opportunities were so hard to find. At the end of 1997, LTCM had nearly $7.5 billion under management, compared to $1 billion when it started, and it now returned $2.7 billion of that to investors.

But both the grand principles and the local clientelism and patronage were totally embedded in local notables and balances of power.”83 This was the “crony capitalism” that the IMF would demand be extirpated in exchange for its emergency loan packages after the Asian financial crisis erupted in 1997. And when the contagion from that crisis spread to Russia the following year, it was the IMF’s very public despair at not being able to do anything about this “crony capitalism” in the Russian case that led it to pull back from its emergency lending, sparking the Russian government’s default in August 1998 on its foreign debt (which at $61 billion represented 17 percent of Russian GDP). Yet until then the pretence had been maintained. In August 1997, just as the Asian financial crisis reared its head and exactly a year before the Russian default, the IMF executive board proudly affirmed that its staff had “assisted its member countries in creating systems that limit the scope . . . for undesirable preferential treatment of individuals and organizations.”84
However hard this was to credit, what was true was that, in terms of the making of global capitalism—the main objective that structural adjustment was actually designed to foster—there had been real success.

…

Instead, this global financial volatility left the developing countries of Asia, Africa, and Latin America increasingly dependent on the crisis-management role of the US empire, as Chapter 10 shows. In the 1990s, at the same time as the US was called upon to act as the global policeman against human rights violations by “rogue states,”48 so was it also expected to put out financial conflagrations around the world. In the wake of the 1997–98 Asian financial crisis, with the US Treasury now explicitly defining its role in terms of “failure containment” rather than “failure prevention,” the cover of Time pictured Alan Greenspan of the Federal Reserve and Robert Rubin and Lawrence Summers of the US Treasury beneath the banner “THE COMMITTEE TO SAVE THE WORLD.”49 Conjured up here was an image of the American state as a global “executive committee of the bourgeoisie” (as Marx famously called the capitalist state).

…

The US Treasury now insisted, as a centerpiece of the IMF agreement, that the ceilings on foreign investment be lifted from 26 to 50 percent.49 Notably, the negotiations took place right in the midst of the country’s presidential election campaign—and all the candidates were required to assent to the conditions before the IMF would declare the rescue package was in place. Its success in this respect led the US economist Rudi Dornbusch to quip on a subsequent American television panel that “the positive side” of the Asian financial crisis was that South Korea “was now owned and operated by our Treasury.”50 The knowing chuckle he elicited from the other pundits may have had less to do with what this said about the extent of imperial power at the end of century than with what it implied about the shifting hierarchy of state apparatuses within Washington itself: after all, it used to be the State Department or Pentagon, rather than the Treasury, that could lay claim to the South Korean franchise.

His ideas really worked, building a billion-dollar economy out of nothing. He tried to replicate its success in Thailand, at a former U.S. Air Force base named U-Tapao, and in China, near the border with Macau. Back in the United States, he was involved with airports in the Inland Empire of California, and in Fort Worth, advising H. Ross Perot, Jr. (the son of the presidential candidate). The pair abroad were never built, scuttled by the Asian financial crisis and the whims of party chairmen. The ones closer to home had better luck, sprouting new appendages from their surrounding cities and nudging Kasarda toward the aerotropolis.
Back in Kinston, signs of trouble had begun to surface. In 1998, FedEx announced it would add a hub somewhere in the state. The Global TransPark’s boosters believed they were in line to get it. They were wrong. The TransPark lost to Greensboro’s airport, snug in the center of the Triad, and the competition wasn’t close.

…

He leveraged his new connections to take a second crack at building the Global TransPark—the next node in what he imagined would be a worldwide web of just-in-time airstrips. The Thais already had a plan on the shelf for converting a Vietnam-era American bomber base to civilian use. Given the chance to get it right this time, Kasarda spent the next six years drafting blueprints and wooing Thailand’s prime minister at the time, until the whole thing was scuttled in the chaos of the Asian financial crisis.
From 1985 until 1996, Thailand’s really was the fastest-growing economy in the world, surging 9 percent annually—faster even than China or India today. Reforms had slashed tariffs and opened the door to foreign investors like Toyota, which moved there for cheap labor, followed by the Big Three. They touched off an industrial boom during which real per capita income doubled, spawning joint ventures and an entrepreneurial class tapping overseas loans.

…

But a team of American architects, developers, technologists, and engineers are convinced they’ve cracked the code, creating a template for cities that are green, humane, dense, smart, and able to be cloned. Their prototype is Stan Gale’s $35 billion aerotropolis rising from the Yellow Sea: New Songdo City.
Instant Cities
New Songdo didn’t set out to be green. Its original purpose was one John Kasarda would have applauded: a weapon for fighting trade wars.
In the aftermath of the Asian financial crisis, the International Monetary Fund handed South Korea a $58 billion bailout, with conditions. One was a command to seek foreign investment. By then, however, its manufacturing base was decamping to China—70 percent of its factories left over the next decade. Trade between the two countries didn’t exist in 1980, but twenty-five years later China would be its largest trading partner. Eager to follow the flying geese once more as its factories vanished into China, Korean leaders resolved to make Seoul the financial and creative hub of northeast Asia—a title for which there was no end of contenders.

The Chinese government had not developed a comprehensive system of public welfare provision, although it was often suggested that many of the most inefficient state companies, by supplying jobs and salaries to workers, offered a crude form of welfare provision. As a final tribute to the success of his programme of public spending, Zhu declared that he was ‘very proud’ of his adoption of an ‘expansionary fiscal policy’. This policy, in his opinion, had ensured that China ‘not only overcame the impact of the Asian financial crisis, but was able to use the opportunity to achieve unprecedented economic growth’.37
In a sense, the Chinese had acted more consistently with Keynesian principles than many other governments would in later crises. Keynes had been brought up in the late Victorian era. His basic assumption had been that governments would try to balance their budgets. He advocated the financing of public spending through borrowing only in exceptional circumstances, as a way of stimulating the economy whenever a downturn occurred.

Other examples of unrestricted warfare include cyberattacks that can ground aviation, open floodgates, cause blackouts, and shut down the Internet.
Recently, financial attacks have been added to the list of asymmetric threats first articulated by Wang and others. Unrestricted Warfare spells this out in a chapter called “The War God’s Face Has Become Indistinct.” It was written not long after the 1997 Asian financial crisis, which cascaded into the global financial panic of 1998. Much of the distress in Asia was caused by Western bankers suddenly pulling hot money out of banks in emerging Asian markets; the distress was compounded by bad economic advice from the Western-dominated IMF. From an Asian perspective, the entire debacle looked like a Western plot to destabilize their economies. The instability was real enough, with riots and bloodshed from Indonesia to South Korea.

…

The fact that these policies favored free-market capitalism and promoted the expansion of U.S. banks and corporations in global markets did not go unnoticed.
By the early 2000s, the Washington Consensus was in tatters due to the rise of emerging market economies that viewed dollar hegemony as favoring the United States at their expense. This view was highlighted by the IMF response to the Asian financial crisis of 1997–98, in which IMF austerity plans resulted in riots and bloodshed in the cities of Jakarta and Seoul.
Washington’s failure over time to adhere to its own fiscal prescriptions, combined with the acceleration of Asian economic growth after 1999, gave rise to the Beijing Consensus as a policy alternative to the Washington Consensus. The Beijing Consensus comes in conflicting versions and lacks the intellectual consistency that Williamson gave to the Washington Consensus.

Anticipating lower prices, those refiners ran down inventories ahead of a cold winter. Other factors included simmering tensions in Iraq and a potential shortage of heating oil in the United States.
THE GHOST OF JAKARTA
The unexpected price increase in 1996 and 1997 averted a full clash between Venezuela and other OPEC members.9 But later in 1997 the Asian financial crisis hit, abruptly hurting oil demand, and threw OPEC and other oil producers back into crisis mode. The Asian financial crisis had its origins in the aforementioned strong growth, which had attracted massive capital inflow that was channeled into a real estate bubble. In July 1997 the Thai currency (baht) collapsed, triggering other Asian currency and banking collapses that mushroomed by year-end into widespread economic downturn and bankruptcies.10 But as OPEC prepared to meet in Jakarta in November 1997, producers’ minds were less focused on the gathering Asian crisis than on the oil price spike that had preceded it.

Such a high level of saving was exacerbated by the policy from 1980 of limiting most families to one child, making it difficult for parents to rely on their children to provide for them in retirement.19 Asian economies in general also saved more in order to accumulate large holdings of dollars as insurance in case their banking system ran short of foreign currency, as happened to Korea and other countries in the Asian financial crisis of the 1990s.
In most of the advanced economies of the West, it was the desire to spend that gained the upper hand, as reflected in falling saving rates. Napoleon may (or may not) have described England as a nation of shopkeepers, but it would be more accurate to say that it is a nation that keeps on shopping. Keen though western consumers were on spending, their appetite was not strong enough to offset the even greater wish of emerging economies to save.

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Even if the former could be imposed by the central authorities on countries in the euro area – and there are few signs that this would be a popular development – to extend the same degree of integration to countries outside the euro area would surely shatter the wider union. For the foreseeable future, the European Union will comprise two categories of member: those in and those not in the euro area. Arrangements for the evolution of the European Union need to reflect that fact.
Such issues are a microcosm of broader challenges to the global order. The Asian financial crisis of the 1990s, when Thailand, South Korea and Indonesia borrowed tens of billions of dollars from western countries through the IMF to support their banks and currencies, showed how difficult it is to cope with sudden capital reversals resulting from a change in sentiment about the degree of currency or maturity mismatch in a nation’s balance sheet, and especially in that of its banking system.

Book titles like The Borderless World, The World Is Flat and One World, Ready or Not summed up the essence of this new discourse.
The beginning of the end: the Asian financial crisis
The euphoria of the late 1980s and the early 1990s didn’t last. The first sign that not everything was fine with the ‘brave new world’ came with the financial crisis in Mexico in 1995. Too many people had invested in Mexican financial assets with the unrealistic expectation that, having fully embraced free-market policies and having signed the NAFTA, the country was going to be the next miracle economy. Mexico was bailed out by the US and the Canadian governments (who didn’t want a collapse in their new free-trade partner) as well as by the IMF.
In 1997, a bigger shock came about with the Asian financial crisis. A number of hitherto successful Asian economies – the so-called ‘MIT economies’ (Malaysia, Indonesia and Thailand) and South Korea – got into financial troubles.

…

Allowing workers to bargain as a group, rather than as individuals who may compete against each other, trade unions help workers extract higher wages and better working conditions from their employers.3
In some countries, trade unions are considered counter- productive, blocking the necessary changes in technologies and work organization. In others, they are seen as natural partners in any business. When Volvo, the Swedish vehicle manufacturer, bought the heavy construction equipment arm of Samsung in the aftermath of the 1997 Asian financial crisis, it is said to have asked the workers to set up a trade union (Samsung had – and still has – an infamous ‘no-union’ policy). The Swedish managers didn’t know how to manage a company without a trade union to talk to!
Like cooperatives, trade unions are membership organizations, in which decisions are made according to the one-member-one-vote rule. These decisions by enterprise-level unions are usually aggregated by national-level unions, such as South Africa’s COSATU (Congress of South African Trade Unions) and the UK’s TUC (Trades Union Congress).

On one side of the Atlantic, there was a good deal of agonizing among economic policymakers: computers were available for any business in any country to use, so why did the productivity benefits of the computer revolution appear to be confined to the United States? On the American side of the Atlantic, there was a sense of triumphalism about the superiority of the U.S. economy and its “New Paradigm,” with its Silicon Valley heroes and soaring stock market. Shocks like the 1995 Mexican near-default, the 1997–1998 Asian financial crisis and the collapse of Long Term Capital Management, and even the technology stock crash of 2001 and the horrors of 9/11 that year, were shrugged off after brief periods of crisis management. The economy appeared to be strong enough to weather anything, and GDP continued to expand for years to come, after a mild and brief downturn in 2001.
The questions about GDP raised by the New Economy episode still stand.

…

Above all, the loss of perspective about the purpose of business, which is not at all the maximization of short-term profit or even shareholder value, but rather delivering goods and services to customers (in ways they might not even know they want), in a mutually beneficial transaction. Profit and share price increases are a side effect, not a goal.3
Finally, the tragic downfall, the nemesis. By the mid-2000s, despite the turmoil of the earlier Asian financial crisis and dot-com bust (in 2001), so-called Anglo-Saxon capitalism appeared triumphant. Its dominance was trumpeted by popular authors such as Thomas Friedman in his books The Lexus and the Olive Tree and The World Is Flat. The message was: this is an uncomfortable ride but deal with it because global capitalism is sweeping the whole world before it. Yet some doubts started to emerge even before the onset of the financial crisis in late 2007.

The reputation of financial economics has never recovered from the blow of the virtual collapse of Long-Term Capital Management, a sophisticated practitioner of the risk models outlined in chapter twelve, and the involvement of two Nobel Prize winners, Robert C. Merton and Myron Scholes. The fund built huge positions on the basis of estimated mispricings, relying on its models to control its exposures. When the Asian financial crisis blew up in 1997, the fund managers extended their positions. They believed their own models. Their failure was a precursor of the much larger failures that would follow a decade or so later.
At the banks a decade later, as in Iraq, evidence and models were used to confirm what was already asserted to be true rather than to challenge the validity of prior assumptions. And in both cases a superficial appearance of considered rationality concealed the crude directness of what was really being done.

The market response should have been that
the banks that judged risk poorly take a financial hit, and the particular individuals who exercised bad judgment on loans should perhaps lose their jobs.
In a free market, there is no place for a supranational institutional like the IMF
to rewrite the rules to ensure that creditors are protected.
The IMF provided the same sort of service in the East Asian financial
crisis in the fall of 1997. In that situation, the IMF forced governments in the region to assume the responsibility to repay loans that banks made to private companies. The problem facing the foreign banks was that these countries had no well-developed bankruptcy laws, so there was no mechanism through which
foreign banks could collect on loans made to companies that were essentially bankrupt at the time.

Solid-to-vapor is an apt summary of the evanescence of value, financial and ethical, that has taken place throughout the great and ongoing financial crisis that commenced in 2007.
The United States, the global evangelist for the benefits of creative destruction, has favored its own church. When governments of emerging markets complained that foreign investors were fearfully yanking capital from their markets during the Asian financial crisis of 1997, liberal democrats in the West told them that this was the way free markets worked. Now we prop up our own markets because it suits us to do so.
The great financial crisis has been marked by the failure of models both qualitative and quantitative. During the past two decades the United States has suffered the decline of manufacturing; the ballooning of the financial sector; that sector’s capture of the regulatory system; ceaseless stimulus whenever the economy has wavered; taxpayer-funded bailouts of large capitalist corporations; crony capitalism; private profits and public losses; the redemption of the rich and powerful by the poor and weak; companies that shorted stock for a living being legally protected from the shorting of their own stock; compromised yet unpunished ratings agencies; government policies that tried to cure insolvency by branding it as illiquidity; and, on the quantitative side, the widespread use of obviously poor quantitative security valuation models for the purpose of marketing.

In the early 1980s, we had a lot of apparently bad events that actually didn’t work out so tragically, at least not for most Americans. Let me list a few:• The savings and loan crisis of the early 1980s
• The failure of Continental Illinois (then a major U.S. bank) in 1984
• The stock market crash of 1987—Black Monday, a 22.5 percent drop in one day
• The bursting of the real estate bubble in the late 1980s
• The Mexican financial crisis of 1994
• The Asian financial crisis of 1997-1998
• The Long-Term Capital Management (a hedge fund) crisis of 1998
• The bursting of the dot.com bubble in 2001
In each case, it seemed initially that something really terrible was happening to the economy. When all was said and done, however, these events ended up looking like smaller problems. In most of these cases, we did patchwork rather than addressing the dilemmas of overleverage and excess risk at a more fundamental level.

On the left, dependency theory gave this position some ideological cover, and today's debates are often filled with similar sentiments. Among NGOs and intellectuals working on development issues, there is talk of apartheid South Africa and Smith s Rhodesia as models of a possible autarkic dehnking from the world economy, and admiration for Mahathir's capital controls in Malaysia during the 1997-98 Asian financial crisis. It's often overlooked that Mahathir is a repressive bigot, and that the Southern African examples were part of strategies to sustain horrible societies. Any "progressive" alliance with national capitalism in the name of resistance to international capitaHsm can get very smelly.
In the U.S., the Citizens Trade Campaign has taken support from the troglodytic textile tycoon Roger MiUiken.^ That's bad enough, but Na-derite trade rhetoric about how the World Trade Organization threatens U.S. sovereignty is pretty bad too; the world has sufiered from too much U.S. sovereignty and could do with a Uttle less.

My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.
—Robert Lucas, presidential address to the
American Economic Association, 2003
GIVEN WHAT WE know now, Robert Lucas’s confident assertion that depressions were a thing of the past sounds very much like famous last words. Actually, to some of us they sounded like famous last words even at the time: the Asian financial crisis of 1997–98 and the persistent troubles of Japan bore a clear resemblance to what happened in the 1930s, raising real questions about whether things were anywhere near being under control. I wrote a book about those doubts, The Return of Depression Economics, originally published in 1999; I released a revised edition in 2008, when all of my nightmares came true.
Yet Lucas, a Nobel laureate who was a towering, almost dominant figure in macroeconomics for much of the 1970s and 1980s, wasn’t wrong to say that economists had learned a lot since the 1930s.

The dynamic of the knowledge society favours the concentration and globalization of capital, precisely because the decentralizing power of networks is brought into play, while ‘there is at the same time differentiation of work, segmentation of workers, and disaggregation of labour on a global scale … Labour loses its collective identity, becomes increasingly individualized in its capacities, in its working conditions, and in its interests and projects.’24
The fixed location of labour means that working people are losers in the struggle to distribute the global risks of globalization. The Asian financial crisis and its consequences shed a bright light upon the previously darkened side of the economic world risk society. Not only do they provide a most striking example of organized irresponsibility; they have also made it clear that whole countries and groups of countries can become victims of global ‘casino capitalism’. The Asian middle classes have been cut to the quick and are threatened in the very basis of their existence.

…

The neoliberal paradigm of politics may be said to involve an immanent contradiction: the power of the state and its institutions is supposed to be meticulously captured and applied to the breaking of that power. This is in a world where the collapse of national institutions in the 1990s has led to truly devastating human tragedies and civil wars in Somalia, East Africa, Yugoslavia, Albania and parts of the former Soviet Union, and now to the threat of turmoil resulting from the South-East Asian financial crisis. Even if the weakening of central state power cannot be solely or primarily attributed to the new influence of global markets, it nevertheless appears that under their pressure a hidden vacuum of state power and legitimacy may suddenly and brutally become apparent.
At a more detailed level too, one can study how the neoliberal revolution undermines its own foundations. Wherever it has been ‘successful’ – in the United States and the United Kingdom, for example – its effects have caused the political coalitions at its head to break apart and to hand over power to the opposition.92 Evidently the neoliberals have not yet realized that the world has become democratic, and that electorates are not prepared to vote in politicians who have inscribed social decline or decomposition on their party banners.

The market has told us that
Indonesia’s connected business elite were making fistfuls of
cash under Suharto’s system of political patronage. Those
who were best positioned to change a corrupt system liked it
fine just the way it was.
Given the system’s benefits to Indonesia’s insiders, it should
come as no surprise that political and economic reform had
stalled and that serious reform attempts materialized only at
39
CH A PTER TW O
the end of Suharto’s rule. As the Asian financial crisis erupted
in late 1997 and Suharto still clung to power, the IMF tried
to impose some discipline on Suharto’s cronies. As a condition of the IMF relief package, state-sanctioned monopolies
were supposed to be dismantled and government-owned
banks were to stop funneling money into well-connected
businesses. But Suharto effectively killed these attempts at
reform. Nor could the Indonesian people appeal to the democratic process.

…

As the new owner, he soon took an active role in planning and operations. Perhaps not impressed by his automotive and management expertise, a
number of top executives soon quit, leaving a manage-
40
SU H A RTO , I N C.
ment vacuum at the company. Nonetheless, the Wall
Street Journal reported in 1998 that Tommy’s stake in
Lamborghini was sold at a significant profit, even under
the distressed circumstance facing Tommy after the
Asian financial crisis. So, was the Lamborghini purchase
a frivolous investment financed by Daddy’s money? Or a
calculated purchase by a savvy investor with expertise in
fast cars? Based on our findings, it appears that Indonesian investors thought much of Tommy's value came
more from connections rather than business smarts.
Is All Corruption Created Equal?
The story of Suharto’s rule in Indonesia also raises the uneasy question of whether outsiders should do anything about
corruption at all.

Cheap imported tires came in because of trade liberalization. We lost market share, and we couldn’t raise our prices as much as we should have. Even without the imports, the market was already very competitive here. There were many tire retreading companies—a few big ones, and many small ones. Especially after we joined the WTO in 1995–96, the industry started to have real problems.
“Then with the Asian financial crisis of 1997, there was devaluation, and the price of imported goods went up. At first we thought that devaluation would help us, that imported tires would become expensive, but that never happened. The prices of imported tires remained low—and our costs went up! We got caught in operating losses that accumulated over the years, and the business failed. In fact, the whole industry failed—many retreading companies closed shop.

…

As activists increasingly combined their efforts across nations to shine light on the negotiating process, elected officials felt the pressure and were ultimately convinced to reject the MAI at the OECD conference in 1998. Its defeat marked one of the first and most important successful global movements of people and governments against an international trade or investment agreement.
At the same time, the devastating reality of these investment rules was on full display as the East Asian financial crisis took hold and began to spread. From 1998 to 1999, nations that had once been characterized as the “East Asian tigers” because of their thriving economies suddenly crashed when the IMF restricted the ability of their governments to regulate which sectors of their economies received foreign investments and how long and in what quantities the investments had to stay. When foreign investors started playing with these nations’ currencies as if they were in a global casino, the governments were powerless to act.

…

One reason for its demise is the increasing number of developing countries whose leaders are now opposed to corporate globalization.
Electoral Victories
Across the globe, peoples’ movements for global justice have swept in elected officials representing their views. These officials have then brought resistance into the institutions of corporate globalization. Walden Bello of Thailand’s Focus on the Global South describes how, in the midst of the East Asian financial crisis, public pressure led Prime Minister Mohamad Mahathir of Malaysia to break with the IMF and impose capital controls, saving the country from the worst effects of the crisis. According to Bello,
Mahathir’s defiance of the IMF was not lost on Thaksin Shinawatra, who ran for prime minister of Thailand on an anti-IMF platform and won. He went on to push for large government expenditures, which stimulated the consumer demand that brought Thailand out of recession.

., Castle House, 75/76 Wells Street, London WIT 3QT
1 2 3 4 5 6 7 8 9 0
For Anya, forever
CONTENTS
Preface ix
Acknowledgments
CHAPTER
I
xix
Another World Is Possible 3
The Promise of Development
CHAPTER 2
CHAPTER
3
Making Trade Fair 61
CHAPTER
4
Patents, Profits, and People 103
CHAPTER
5
Lifting the Resource Curse 133
CHAPTER
6
Saving the Planet 161
25
CHAPTER 7
The Multinational Corporation
CHAPTER 8
The Burden of Debt
187
211
CHAPTER 9
Reforming the Global Reserve System
CHAPTER I0
Democratizing Globalization 269
Notes 293
Index 339
PREFACE
M
y book Globalization and Its Discontents was written just
after I left the World Bank, where I served as senior vice
president and chief economist from 1997 to 2000. That
book chronicled much of what I had seen during the time I was at the
Bank and in the White House, where I served from 1993 to 1997 as a
member and then chairman of the Council of Economic Advisers under
President William Jefferson Clinton. Those were tumultuous years; the
1997-98 East Asian financial crisis pushed some of the most successful
of the developing countries into unprecedented recessions and depressions. In the former Soviet Union, the transition from communism to
the market, which was supposed to bring new prosperity, instead
brought a drop in income and living standards by as much as 70 percent. The world, in the best of circumstances, marked by intense competition, uncertainty, and instability, is not an easy place, and the
developing countries were not always doing the most they could to
advance their own well-being.

Because defiant militaries carried national legitimacy, ASEAN’s inauspicious beginnings saw it grappling with Sukarno’s aggressive Indonesian “Konfrontasi” policy toward Malaysia, followed by conflicts in Vietnam and Cambodia.1 For decades, it remained an anticolonial bloc in which the United States boosted military rule to counter agrarian Marxism (tripling the size of the Thai military, for example). Like the EU, ASEAN experienced its Bosnia-like moments after the Cold War: the Asian financial crisis, Indonesian forest-fire haze, the East Timor intervention, and the SARS outbreak. Each tested the coherence and utilty of ASEAN, and spurred the rapid development of collective mechanisms for trade integration and combating terrorism, environmental decay, transnational crime, and disease. Mutual interference has become as much the norm as visa-free travel among its five hundred million citizens.2 Some ASEAN countries still have defense agreements with the United States, which now hopes to shape the multilateral bloc into an anti-China hedge.3
But the ASEAN club lies in China’s backyard.

…

To break free of America’s strategic encirclement, China is picking off ASEAN members one by one and pulling them into its neotribute system such that the individual ties each enjoys with China are now more powerful than the ties among themselves. “ASEAN countries kowtow to China not only to avoid being on China’s bad side,” a Thai diplomat and former ASEAN official explained, “but on the promise that China will not abandon them in times of need, as the U.S. did during the Asian financial crisis.” ASEAN is now synonymous with China’s multitiered periphery: Singapore, Malaysia, and Brunei as the wealthiest partners; Thailand, Indonesia, and Vietnam as economic and strategic assets; and Burma, Cambodia, Laos, and the Philippines as third-world clients. With all of them, China is granting greater market access and sustaining trade deficits (which have brought record profits to ASEAN businesses) in exchange for raw materials, defense agreements, and diplomatic pledges to lean its way.4 Like Europeans in the Maghreb, Chinese baby-boomers are buying retirement properties from Penang to Bali, enlarging a greater Chinese co-prosperity sphere for the twenty-first century.

…

The former spice route sultanate of Malacca now blends Portuguese colonial architecture with computer assembly plants, while Kuala Lumpur residents can purchase gourmet foods at Carrefour, the paragon brand of first-world grocery shopping.
Leadership can make much of the difference anywhere in the world, and while Venezuelans are stuck with Hugo Chávez, Malaysians had Mahathir bin Mohamad. Mahathir and his advisers were convinced that globalization was dangerous unless it was steered. During the Asian financial crisis, they bucked the international strictures that ravaged the Thai and Indonesian economies, instead imposing capital controls to keep the Malay ringgit afloat. As second-world leaders increasingly realize that globalization requires strong management to avoid uncontrollably exacerbating existing disparities, they are more likely to emulate Malaysia than Argentina.
“Dr. M,” as Mahathir’s supporters call him, is a Muslim Lee Kuan Yew, second only to Lee as a defender of Asian values, who argues that there are common virtues between Islam and Confucianism, such as reciprocity and loyalty.

Geithner’s notion of convening power states that, in a crisis, an ad hoc assembly of the right players could come together on short notice to address the problem. They set an agenda, assign tasks, utilize staff and reassemble after a suitable interval, which could be a day or month, depending on the urgency of the situation. Progress is reported and new goals are set, all without the normal accoutrements of established bureaucracies or rigid governance.
This process was something Geithner learned in the depths of the Asian financial crisis in 1997. He saw it again when it was deployed successfully in the bailout of Long-Term Capital Management in 1998. In that crisis, the heads of the “fourteen families,” the major banks at the time, came together with no template, except possibly the Panic of 1907, and in seventy-two hours put together a $3.6 billion all-cash bailout to save capital markets from collapse. In 2008, Geithner, then president of the New York Fed, revived the use of convening power as the U.S. government employed ad hoc remedies to resolve the failures of Bear Stearns, Fannie Mae and Freddie Mac from March to July of that year.

See income inequality
infant-industry protection
inflation: in asset prices expectations of Federal Reserve policies and, relationship to unemployment in United States
innovation See also technological change
institutional economics
insurance: bond earthquake livelihood mortgage,See also health insurance; unemployment benefits
interest rates: on bank deposits in China consequences of low effects of expectations hypothesis and increases to fight inflation in Japan long-term low levels of on mortgages on savings short-term, spreads of Taylor rule and
International Monetary Fund (IMF): Asian financial crisis and conditionality of loans influence of Mexican loans (1994) policy coordination role of reforms in staff of, warnings about trade imbalances
Internet: communicating with public through distance education use in hiring
investment: bond holders boom in in China in East Asia housing incomes from in managed capitalist systems in physical capital relationship to saving, See also foreign
investment
investment banks See also banks
investment managers, See also hedge funds
Jackson Hole Conferences
Japan: central bank of competition in consumption in economic growth of education in elevator ladies in employment in energy consumption in exchange-rate policies of export-led growth strategy of exports of, financial bubble and crisis in health care costs in keiretsus in managed capitalism in
jobless recoveries: political pressure for economic stimulus during in United States
jobs.

These sorts of mutual assistance agreements are typical in many religions, including Christianity, Hinduism, Buddhism, and Islam. Gallup polls in 145 countries have found that people who attend religious services donate more to charity and perform more voluntary service than those who do not. When crises drive people into the arms of God, they embrace Him for the insurance as well as the spiritual solace. When the Asian financial crisis struck Indonesia in 1997, the rupiah lost 85 percent of its value, the price of food nearly tripled, real wages plummeted by almost half, and the study of the Koran soared.
Indonesian Muslims study the Koran in communal events called “Pengajian,” in which a teacher lectures and leads the recitation of the religious text. At these gatherings substantial social pressure is brought upon believers to make charitable contributions for the needy.

…

Drunk on information technology’s promise, people poured retirement savings into companies like Pets.com, which achieved fame, though never profit, on the strength of a cute ad with a sock puppet. In 2000, AOL could use its pricey stock to take over media goliath Time Warner, which had more than five times its revenue. By October of 2002 the NASDAQ was back where it had been in 1996. In 2010, Time Warner quietly spun off AOL for a tiny fraction of its price a decade before.
The dot-com crash was preceded by the Asian financial crisis, with subsidiary bubblettes from Russia to Brazil, when a surge of money into promising “emerging markets” abruptly went into reverse. Similar dynamics caused investors to pummel the Mexican peso during the tequila crisis a few years before. Japan’s Nikkei 225 stock index tripled in real terms between January 1985 and December 1989, only to fall 60 percent over the next two and a half years.

Traders are not generally known for their generosity over a deal, but ITOCHU, for example, says it very much values the spirit of sampo yoshi, which it translates as “good for the seller, good for the buyer, and good for society.”
Exhibit 3.2 Japanese general trading companies (sōgō shōsha) (turnover in FY ended March 2011)
Source: Company reports. Exchange rate: US$ @ 80¥
The trading arms of the big South Korean family-run business groups (known as chaebol) sought to emulate the Japanese, but they, too, were forced to trim their sails after the Asian financial crisis of 1997–1998 and the chaebol restructuring that followed. Of those that remain, SK Networks is the biggest with turnover of $22 billion, followed by Samsung C&T, LG International, Hyundai Corp., and Hanwha Corp. Like the Japanese trading houses, they invest in overseas resources projects. SK Networks, for example, paid $700 million in 2010 for a 14 percent stake in MMX, a Brazilian iron ore miner set up by billionaire Eike Batista’s EBX Group.

…

Aburizal Bakrie stepped down as group chairman in 2004, but retains influence as head of the family. His younger brothers Indra and Nirwan have taken larger roles in recent years. Aburizal, now chairman of the Golkar political party, has seen his family’s business come close to ruin on more than one occasion over the last 20 years, most recently in 2008 after the global financial crisis, and in 1997–1998 when the Asian financial crisis rocked Indonesia’s currency and brought down the Suharto regime. Bakrie continues to carry a heavy long-term debt load, with China Investment Corp. among its creditors. Aburizal Bakrie was an unsuccessful contender to be Golkar’s candidate for the presidency in 2004, and may seek to run again in 2014. In 2010, UK financier Nathaniel Rothschild joined forces with the Bakrie family and Indonesian private equity investor Rosan Roeslani to form London-listed Bumi Plc as a vehicle to hold stakes in Bumi Resources and Roeslani’s own big thermal coal producer in Kalimantan, Berau Coal Energy.

But it can also result in domestic job losses that decimate whole communities – as experienced in America’s ‘rust belt’, the nation’s former industrial heartland. Likewise, financial inflows may boost an emerging economy’s fledgling stock market but when international finance exits even faster than it entered, it can induce a near collapse of the currency, as Thailand, Indonesia and South Korea discovered the hard way during the Asian financial crisis of the late 1990s. Cross-border flows are always double-edged and so need to be managed.
Ricardo was right in thinking that very different nations may be able to trade to mutual gain, but comparative advantage is not only what you are blessed with: it is something you can build. As Ha-Joon Chang puts it, however, today’s high-income countries are ‘kicking away the ladder’ that they once climbed, recommending that low- and middle-income countries open their borders to follow a trade strategy that they strategically avoided themselves.

China’s Mixture of Investment Capital
China’s banking system is a mixture of four giant state-owned banks, derivative of the socialist economy; joint-stock commercial banks founded for development purposes in 1994; and city banks. The government owns a majority interest in almost all state banks. Direct foreign investment is large and comprised mainly of long-term commitments. Termed “patient capital,” these commitments allowed China to survive the Asian financial crisis of 1997–1998 much better than most countries in the region. The Chinese are great savers, so interest rates have continued to be low. Private and public savings in China have formed America’s great piggy bank in its twenty-first century spending spree. Corporations in China still have far to go in creating sound organizations. State banks are plagued with insider favoritism. The security of Chinese investments is going to depend upon putting in place financial accountability, better laws, and transparency.

A remarkable thing happens to money when it passes through Mr. Soros; it emerges multiplied, but otherwise unchanged. With other inputs the results are more disappointing—to be blunt, more in line with biology. Mr. Soros gorged on chopped philosophy, mashed economics, and facts and figures swimming in grease. It was too much. Before he knew what was happening out rushed this book.26
During the Asian financial crisis of 1997/8, Mahathir Mohammed, prime minister of Malaysia, also a less benign view of Soros: “All these countries [in East Asia] have spent 40 years trying to build up their economies and a moron like Soros comes along with a lot of money to speculate and ruin things.”27 The Prime Minister made no mention of his own Pharaonic projects funded by borrowings from foreigners. Slovenian philosopher Slavoj Žižek captured the essence of Soros: “Half the day he engages in the most ruthless financial exploitations, ruining the lives of hundreds of thousands, even millions.

…

On their only day off, the women meet to picnic on pieces of cardboard, read books, and write letters to the families they left behind. Poorly paid, often abused, they work long hours to support extended families back in the Philippines. In the hustle and bustle of Hong Kong’s financial center, they are the only people who smile and laugh. Among them, there is a rare sense of community.
Talking about the human effects of the crisis, a friend tells me a story about Indonesia during the Asian financial crisis more than a decade ago. Fluent in Bahasa Indonesia, he overheard a conversation one night outside the hotel where he was staying. A mother and her two daughters were discussing who would sell herself that night to feed the family.
The crisis has led to cutbacks in the number of Filipino maids in Hong Kong. They face competition from women from mainland China. On the street, an older woman comforts her younger companion.

Morgan that lured AIG into the credit default swap business. The bank’s initial 1994 swap deal—the one that insured against an Exxon default—had gone off without a hitch. Since then, J.P. Morgan had done a handful of similar deals, while at the same time using credit default swaps internally to better evaluate its loan portfolio. In 1997, after the bank lost millions in bad loans during the Asian financial crisis, the credit derivatives team was put in charge of the bank’s commercial lending department, much to the horror of the old-time commercial lenders. They began using swaps to perform risk analysis on the loan portfolio. Credit default swaps were truly becoming central to the way the bank did business.
As for the regulators, once they began to understand what credit default swaps did, they warmed up to them.

…

Born, for her part, said that CFTC was a long way from trying to regulate derivatives; all it was trying to do was ask some useful questions and glean some useful answers. “Greenspan thought even asking the questions was dangerous,” recalls Born.
And where was Rubin? Given his history of concerns about derivatives, you might have expected him to be Born’s one ally in the room. During the Asian financial crisis, Rubin had asked one of his aides to find out how much derivatives exposure U.S. financial institutions had to South Korea. “We couldn’t find out,” this aide recalled. Rubin was stunned. But in this meeting, Rubin sided, without hesitation, with his fellow regulators. His reaction to Born’s arguments was almost visceral—a far cry from the man who was so admired for his ability to listen and ask questions.

.: Princeton University Press, 2001): Thomas Laubach and Adam S. Posen.
34 Kevin Warsh, “Hedge Funds and Systemic Risk: Perspectives on the President’s Working Group on Financial Markets,” Hearing of the House Financial Services Committee, July 11, 2007.
35 Ibid.
36 Randall S. Kroszner, “Analyzing and Assessing Banking Crises,” speech at the Federal Reserve Bank of San Francisco Conference on the Asian Financial Crisis Revisited, San Francisco (via videoconference), September 6, 2007.
37The Fed followed with a surprising announcement. It would “continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets.” This was an extraordinary change on the part of the Fed.
Elsewhere in Washington, Secretary of the Treasury Hank Paulson told Fortune in July 2007: “This is far and away the strongest global economy I’ve seen in my business lifetime.”39 In August 2007, Paulson said that the subprime mortgage fallout remained “largely contained.”40 (By February 2008, Paulson admitted: “In terms of subprime and the resets, the worst isn’t over, the worst is just beginning.

It’s a shame the Fed doesn’t possess more Richard Fishers. Since the departure of Paul Volcker in 1987, the Federal Reserve has the unwelcome record of having gotten every single major decision wrong. Every time there has been a hint of a crisis, the Fed has acted like some senior court advisor to the Emperor of Planet Ponzi. The 1987 stock market crash, my liege? I’ll pump in liquidity. Asian financial crisis, sire? I’ll flood the place with dollars. A major hedge fund, LTCM, has gone bust, your majesty? I’ll organize a bailout. Dotcom bubble? Let’s watch it inflate. Even the September 11 terrorist attacks‌—‌surely a matter for the US security apparatus rather than its monetary authority‌—‌were taken as an excuse for monetary loosening.
Little wonder that inflation has been racing away. Little wonder that the Washington establishment has been ever more anxious to manipulate the data.

…

The poster-child for irresponsible risk-taking was Long-Term Capital Management, which failed in 1998 under a senior management too impressed by its own academic excellence. Unfortunately, the real world is no respecter of academic reputations. The firm took on too much debt and bet the proceeds with too little thought for what might happen if things didn’t turn out as expected. When the Asian financial crisis was followed by a Russian one, LTCM found that its ‘safe’ bets had turned sour on a colossal scale. Given the scale of leverage at the firm‌—‌its capital represented just 3% of assets‌—‌there was no return from that misjudgment. A bailout, organized by the New York Fed, saw the firm’s creditors take control. The $1.9 billion which the firm’s principals had invested in it was wiped out.6
The story contains another moral.

For America, China is manipulating its currency artificially to prolong its export boom. The size of China’s foreign currency reserves, at one point half of China’s GDP, far outweighs its needs. For China, the reserves are a consequence of the efforts of its people, a sensible insurance policy against the speculative attacks made against the currencies of neighbouring countries during the East Asian financial crisis of 1997. China vowed that the agony, indignity and loss of sovereignty inflicted on its near neighbours then would not occur to it.
China does not have a happy historic memory of how its large trade surpluses have been dealt with by more powerful nations. For centuries, China was not really interested in the goods the West was trying to sell it, as attested by a letter written in the late eighteenth century to George III by the Emperor Qianlong: ‘We possess all things and of the highest quality… I set no value on the strange and useless objects and have no use of your country’s manufactures.’

…

For anyone looking through an economic lens, however, Gangnam Style was far more interesting, an ironic critique of the absurdities of the crass consumerism that has emerged across South Korea over the past decade.
In the 1980s and 1990s, South Korea had its own export-led manufacturing boom. A key feature of this was the thriftiness of Korean households. For thirteen consecutive years, Korean households were the number one savers in the rich man’s club of world nations, the OECD. Koreans saved around 25 per cent of their income. After the Asian financial crisis of the late 1990s, however, household saving collapsed, dropping as low as 0.4 per cent in 2002, and staying below 3 per cent in recent years. It was a spectacular fall to the bottom of that OECD savers’ league table.
South Korea’s reputation for household thrift evaporated in an orgy of housing speculation, child tuition fees and credit-fuelled purchases of expensive Western brands. If the same happened in China – which could come about if the government allowed the renminbi to increase in value – China’s exporters could reorientate towards their massive domestic market.

Even if we are wrong on our underlying premises, we usually break even because we have entered at optimum pricing. And if the underlying hypotheses do not materialize, we get out, even if the trade is making money. Making money for the wrong reasons means you are rolling the dice, not trading. We are not here to gamble. Trades have to be making money for the reasons that we have identified and have the proper risk versus reward.
The Asian financial crisis theme in 1998-1999 is a good example. The underlying premise was that a lack of transparency would stop the flow of funds into Asia, and we shorted the Hang Seng. The trade started working in our favor, but funds did not stop flowing into Asia, even though transparency did not increase, so we got out of the trade.
With such a high hurdle for trades to get into your portfolio, do you sometimes find that you have a shortage of trades in the book?

…

There are a myriad of ways to express themes. We are very good at looking out at the periphery for trade ideas, not getting stuck at the center of a view or theme.
You mentioned you have a one-year time horizon for trades. How far ahead do you look in developing your themes?
Time horizons on themes vary considerably, from maybe six months to five years. We look at trends. For example, the Asian financial crisis theme lasted about six months, whereas the theme around commodity inelasticity of demand and supply has been on since inception. But the trades within a theme are all structured around a one-year investment horizon, both economically and technically. We look at valuations and targets based on one-year economic values, and our technical price model is also based on a one-year horizon. We might have two-, three-, five-year economic targets, but trades are one year.

If your ne’er-do-well cousin asks for a loan, you may decide to give it only on condition that he change his behavior in a way that makes it likely that he will pay back the loan—that he stop drinking, that he get a job, etc.
The IMF has had some notable successes. It helped South Korea and Thailand with financial squeezes in the 1980s, after which they had rapid growth. The IMF bailout of Mexico in 1994–1995, although much criticized at the time, worked well. The Mexican government repaid the loans in advance, and economic growth resumed. Most recently, the IMF handled the 1997–1998 East Asian financial crisis with some success, especially, again, in South Korea.
The IMF recruits talented Ph.D.’s in economics, who observe strong norms of professional analysis. It has an outstanding research department, as well as other specialized departments that provide valuable technical advice to poor countries on their fiscal and financial systems. The IMF has been a good source of economic advice to countries on the wisdom of government solvency and the folly of excessive government debt and deficits.

…

Post-program inflation under the IMF was higher than the program targets on average in the 1990s for a worldwide sample of countries.13
Conversely, what if people holding domestic currency suddenly panicked and wanted to turn it in for the central bank’s dollars? It’s not always clear why they panic, but it happens. International reserves would drop precipitously for reasons unrelated to government budget deficits. Many economists think that this is a good description of the East Asian financial crisis of 1997–1998. East Asian countries were not running large government deficits, yet they suffered currency panics and disappearing foreign exchange reserves all the same.
Another loophole in the relationship between budget deficits and foreign exchange reserves is that the government finances its deficit not only with central bank credit but also with foreign debt. The willingness of foreign investors and banks to buy government bonds is another unknown.

The result is that we export more and import less, thereby reducing the trade deficit and possibly even turning it into a surplus.
In the first half of the Clinton administration, to some extent, this process played out as the textbook would dictate, but the tables turned when Robert Rubin became Treasury Secretary in January 1995. Rubin was openly committed to a strong dollar. When he first took office this may have just been words, but in 1997, during the East Asian financial crisis, he had the opportunity to put some serious muscle behind them.
The United States used its de-facto control of the International Monetary Fund (IMF) to impose harsh conditions on the crisis countries. The IMF effectively acted as an enforcement agent for the banks that had made loans to the companies and countries in the region. To repay these loans, the countries had to run massive trade surpluses, which required a sharp decline in the value of their currencies against the dollar in order to make their exports hypercompetitive and to discourage imports.

Bangladesh is an example of a very gradual turnaround: there is no dramatic “event” worthy of particular notice, but over a quarter century policies and some institutions improved from abysmal to adequate (though governance did not, as you will recall).
However, a large improvement is not enough; it must be sustained. We decided to define “sustained” as being at least five years. Had we chosen a very long period of sustained improvement, we would have excluded situations such as in Indonesia. The improvement in Indonesia began in 1967 and was broadly sustained until the collapse associated with the Asian financial crisis of 1998. It seemed to us unreasonable to attribute that collapse to failures in the original reforms.
Having established what we meant by a turnaround in a failing state, we were at last ready to investigate what generated them. We first investigated the preconditions for a turnaround and then tried to find out what determined whether a turnaround, once it had started, progressed to a decisive escape from being a failing state.

Global surpluses of labor, including vast numbers of former rural peasants in China, combined with the market power of chains such as Wal-Mart, have led to relentless downward pressure on apparel workers’ wages. Other contributors to low prices include artificially inexpensive global shipping, technological innovation in inventory control, and fierce competition among suppliers. In the late 1990s, the Asian financial crisis accelerated the downward price trend as exporting economies endured a severe contraction that further eroded wages. The cost of a dress, a pair of pants, or a coat declined sharply. The consumer price index for apparel, which stood at 127 in 1991, fell to a low of 117.9 in 2006.
For twenty years, consumers have ratcheted up their purchases of apparel. Consider the category of outer- and underwear (which excludes socks and hosiery, but includes all other apparel, such as pajamas, swimsuits, and so on).

Rui Izumi, associate professor at the School of Economics, Senshu University,
in Tokyo, personal correspondence with Jacqui Dunne: “Major factors that have contributed to the growth of local currencies: First, and perhaps surprisingly, was a program on national television in the late 1990s called Michael Ende’s Last Message. This
broadcast profiled complementary systems from the 1930s in Europe up [to] today’s
WIR, LETS, and other popular systems. It touched a collective nerve. At that time,
Japan was in deflationary depression after the East-Asian financial crisis happened
in 1997 and a bubble economic collapse in 1991, and these caused many Japanese
people to wonder about speculation and money. Second, Toshiharu Kato, a bureaucrat at Department of Trade and Industry, created the term ‘Eco-money.’ Many
people felt an affinity with the term rather than the phrase ‘community or complementary currency,’ and many books with the title containing the term ‘Eco-money’
were published.”
13.

All emergent sectors of the twenty-first-century manufacturing and services economy—clean technology, health care, education—require sensible public and private synergy to spur job creation and growth. Business and government can’t forever point to each other’s leaks. If the boat sinks, everyone is a victim.
*With the inclusion of the European Union and eventually Russia, G-7 has actually been more a G-9; it is also referred to as the G-8.
*The G-20 actually first convened in 1999 after the Asian financial crisis, but it did not gain momentum until 2008. The G-20 members are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States.
Part Two
SAVING US FROM OURSELVES
Chapter Four
Peace Without War
Diplomacy without power is like an orchestra without a score.

In 1954, following the Korean War, South Korea’s per capita GDP was lower than that of Nigeria, which was to win its independence from Britain in 1960. Over the following fifty years, Nigeria took in more than $300 billion in oil revenues, and yet its per capita income declined in the years between 1975 and 1995. In contrast, South Korea grew at rates ranging from 7 to 9 percent per year over this same period, to the point that it became the world’s twelfth-largest economy by the time of the Asian financial crisis in 1997. The reason for this difference in performance is almost entirely attributable to the far superior government that presided over South Korea compared to Nigeria.
Between rule of law and growth
In the academic literature, the rule of law is sometimes considered a component of governance and sometimes considered a separate dimension of development (as I am doing here). As noted in chapter 17, the key aspects of rule of law that are linked to growth are property rights and contract enforcement.

…

Following the delegitimization of the military government of General Chun Doo-Hwan after the Kwangju massacre in 1980, these new social groups began agitating for the military to step down from power. With some gentle nudging from its ally the United States, this happened in 1987, when the first democratic elections for president were announced (arrow 3). Both the country’s rapid economic growth and its transition to democracy helped strengthen the regime’s legitimacy, which in turn helped, among other things, to strengthen its ability to weather the severe Asian financial crisis of 1997–1998 (arrows 4 and 5). Finally, both economic growth and the advent of democracy helped to strengthen South Korea’s rule of law (arrows 6 and 7).
In South Korea’s case, all of the different dimensions of development tended to fortify one another, as modernization theory suggested, though there was a definite sequencing of stages that delayed the onset of electoral democracy and rule of law until industrialization had occurred.

But in credit you can express the same bullish view in so many ways because there are a variety of instruments to work with—companies generally issue dozens of bonds and loans with different maturity dates and in senior or junior parts of the capital structure. And that’s even before you get to the various types of credit derivatives.” And so this promising young man found himself at a moment of tremendous opportunity in an area that he loved, where there were essentially no veterans let alone experts.
Interesting things began to happen. Just before Weinstein joined Deutsche, there was the 1997 Asian financial crisis, where Korean banks verged on collapse. Then Thailand couldn’t pay its debts. Then a few months later, Russia defaulted on its debt, indirectly leading to the collapse of the colossal hedge fund Long Term Capital Management, threatening American, European, and Japanese banks with catastrophe. Suddenly the availability of credit around the world was very limited.
Having earlier bought credit derivatives on the cheap, Weinstein was able to monetize those positions as the crisis unfolded, rewarding Deutsche with significant profits.

This ‘unprecedented shift’ has reversed the long-standing drain of wealth from east, south-east and south Asia to Europe and North America that has been occurring since the eighteenth century – a drain that Adam Smith noted with regret in The Wealth of Nations. The rise of Japan in the 1960s, followed by South Korea, Taiwan, Singapore and Hong Kong in the 1970s, and then the rapid growth of China after 1980, later accompanied by industrialisation spurts in Indonesia, India, Vietnam, Thailand and Malaysia during the 1990s, has altered the centre of gravity of capitalist development, although it has not done so smoothly. The east and south-east Asian financial crisis of 1997–8 saw wealth flow briefly but strongly back towards Wall Street and the European and Japanese banks.
If crises are moments of radical reconfigurations in capitalist development, then the fact that the United States is having to deficit-finance its way out of its financial difficulties on such a huge scale and that the deficits are largely being covered by those countries with saved surpluses – Japan, China, South Korea, Taiwan and the Gulf States – suggests this may be the occasion for such a shift.

Finance will have to be returned to its role as servant, not master, of the
global economy, to dealing prudently with people’s savings and providing regular
APPENDICES
169
capital for productive and sustainable investment. Regulation of finance, and the
restoration of policy autonomy to democratic government, implies the reintroduction
of capital controls. Governments need the freedom to use capital control as an active
component of economic policy, to encourage certain types of capital flow and to
discourage others. The Asian financial crisis of the late 1990s made it very clear that
countries with capital controls were both insulated from the crisis and retained policy
autonomy to pursue their national economic priorities. The current crisis drives the
final nail in the coffin of the idea that countries should simply abandon all interference
with international financial markets. The logic for doing so is that allowing completely
open access would bring major economic benefits – there is no evidence at all that this
is what has happened, but plenty of evidence that the opposite is true.
14 Make taxation work
In the new period of public resources being enormously stretched by support given to
the banks, it will be vital to minimize corporate tax evasion by clamping down on tax
havens and corporate financial reporting.

“Reforms” means liberalization and opening the country up to foreign investment, subordinating the country to the corporate-dominated globalization system. So naturally we’re in favor of that. India’s macroeconomic statistics are not bad, so there’s been growth and great praise for India, despite objections that it is moving too slowly. It didn’t liberalize finance, as South Korea did under U.S. pressure. This is part of the reason, it is widely assumed, that South Korea was hit so hard by the Asian financial crisis while India, like China, stayed more or less immune. There’s a fair amount of U.S. and other foreign investment coming in, a lot of buying up of the country. But there’s more to it, as usual.
India, unlike the United States and like practically every other industrial country outside the U.S., keeps regular social statistics. The U.S. is maybe the only industrial country that doesn’t do this.

In financially liberalized advanced economies, the latter operation is normally the province of fiscal authorities, not a central bank acting in its narrow monetary policy capacity. Either by charter or by tradition, most advanced-country central banks are highly reluctant to get involved in operations that seem to favor particular markets. A dramatic and successful exception occurred during the Asian financial crisis of the late 1990s, when the Hong Kong Monetary Authority stunned the world by buying into its country’s stock market to fend off a currency attack. Back then, it was considered an unorthodox and highly successful maneuver. For advanced economies, this kind of intervention has been the exception, not the rule, at least before the 2008 crisis. That crisis changed everything. In the political paralysis that followed, central banks were forced to shoulder added burdens.

The ensuing collapse in the
Indonesian economy simply ratcheted up the tension, with mob
violence leading to brutal attacks on Chinese communities, some of
which were seen as soft targets. Ultimately, though, the Indonesian
people knew whom to blame. Suharto may have been re-­elected in
March 1998 but everyone knew the outcome was rigged. Two
months later he was gone, a victim of popular student-­led uprisings,
economic meltdown and, ultimately, a nation’s refusal to accept
ongoing political corruption. Suharto didn’t cause the Asian financial crisis but he was one of its most visible casualties.
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When the Money Runs Out
Malaysia: Mahathir Deflects Blame
Mahathir Mohamad, Malaysia’s leader, adopted a rather different
approach. He, too, had been in power for many years, first becoming
Prime Minister in 1982. Yet he survived the Asian crisis. As with
Indonesia, Malaysia had seen a fourfold increase in per capita
incomes between the mid-­1960s and the mid-­1990s.

Markets worked in Indonesia because the state was able to control freelance corruption and thus limit the investment-deterring effects that corruption usually has. Given that corruption exists, it does less harm to markets if it is monopolized than if it is free for all.
Indonesia’s system relied on the power of one man, and fell with him. Suharto resigned in 1998 after riots in which over a thousand people died. The end came partly because of the external shock of the 1997 Asian financial crisis, which was beyond the ability of Indonesia’s stunted political, legal, and regulatory institutions to cushion, and partly because of the people’s disgust at the Suharto government’s cronyism. Demonstrating students chanted “KKN,” for korupsi, kolusi, nepotisme. In the students’ opinion, corruption, collusion, and nepotism were the causes of the crisis. The economy plummeted, contracting in 1997–1998 by more than 16 percent.

Mexico was hailed as a free market triumph and a model for others until its economy collapsed in December 1994, with tragic consequences for most Mexicans, even beyond what they had suffered during the “triumph.” The cheers now resound once again, while wages have fallen more than 25 percent since 1994 (the first year of NAFTA), after a very severe decline from the early 1980s, when the liberal reforms were initiated; real minimum wages dropped more than 80 percent from 1981 to 1998.12 Just as the Asian financial crisis erupted, the World Bank and IMF published studies praising the “sound macroeconomic policies” and “enviable fiscal record” of Thailand and South Korea, singling out the “particularly intense” progress of “the most dynamic emerging [capital] markets,” namely “Korea, Malaysia, and Thailand, with Indonesia and the Philippines not far behind.” These models of free market success under IMF-World Bank guidance “stand out for the depth and liquidity” they have achieved, and other virtues.

For an even better example of just how profound the changes associated with the rise of the rest will be, reread the coverage of the November 2008 G-20 summit in Washington, D.C., which took place during the tensest days of the global financial crisis. Every prior crisis had been handled by the IMF, the World Bank, or the G-7 (and, later, the G-8). In past crises, the West played the part of the stern schoolteacher rebuking a wayward classroom. The lessons the teachers imparted now seem discredited. Recall that during the Asian financial crisis the United States and other Western countries demanded that the Asians take three steps—let bad banks fail, keep spending under control, and keep interest rates high. In its own crisis, the West did exactly the opposite on all three fronts.
Economics is not a zero-sum game—the rise of other players expands the pie, which is good for all—but geopolitics is a struggle for influence and control.

Political scientist Francis Fukuyama, in his 1992 book The End of History and the Last Man, made the case for the triumph of Western liberal democracy and market systems as the end point of ideological evolution.
In reality, though, the period was punctuated by a series of rolling bubbles and crises: the 1987 stock market crash, the 1990 collapse of the junk bond market, the 1994 great bond market massacre, the 1994 Tequila economic crisis in Mexico, the 1997 Asian financial crisis, the 1998 collapse of the hedge fund Long-Term Capital Management, the 1998 default of Russia, and the 2000 dot-com crash. These one-in-ten-thousand-years events seemed to occur every year or so.
In 1989, Japan, considered an economic poster child, fell into a prolonged recession following the collapse of a credit-fueled real estate and stock boom. Apologists for the new economic model argued that the experience of Japan confirmed the superiority of the more flexible, competitive, and dynamic market models of the US, and others like them, for delivering growth.

pages: 443words: 98,113

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay
by
Guy Standing

The titans of finance became ‘masters of the universe’, in Tom Wolfe’s famous phrase in The Bonfire of the Vanities, his 1987 novel satirising Wall Street, as they mingled with heads of state and spent time in senior government posts before returning to make yet more money from speculation.
The rise of finance was accompanied by more frequent and widespread financial crises, from the Latin American debt crisis in the 1980s to the worldwide banking collapse of 2007–08 and subsequent global recession. Little was done to prevent them, even after the Asian financial crisis of 1997–98 and the related collapse of Long-Term Capital Management, a US hedge fund that boasted two Nobel Prize-winning neo-liberal economists on its board. There was no political will to challenge the might of financial capital.
At the heart of neo-liberalism is a contradiction. While its proponents profess a belief in free ‘unregulated’ markets, they favour regulations to prevent collective bodies from operating in favour of social solidarity.

pages: 351words: 93,982

Leading From the Emerging Future: From Ego-System to Eco-System Economies
by
Otto Scharmer,
Katrin Kaufer

Says Lawrence Lau, professor of economic development, emeritus, Stanford University, and chairman, CIC International (Hong Kong): “The overwhelming majority of foreign exchange transactions are thus purely speculative, in effect, pure gambles, and serve no useful social purposes.”3 This disconnect between the financial and the real economy produces the financial bubbles that keep plaguing the global economy: the Latin American debt crisis (1980s); the Asian financial crisis (1997); the dot-com bubble (2000); and the US housing crisis (2006–07), which was followed by the world financial crisis (2007–09) and the euro crisis (2010–). Such financial bubbles destabilize the real economy instead of serving it.
2. A disconnect between the infinite growth imperative and the finite resources of Planet Earth. The disconnect between the infinite growth that current economic logic demands and the finite resources of Planet Earth has produced a massive bubble: The overuse of scarce resources such as water and soil has led to the loss of a third of our agricultural land globally in roughly one generation’s time.
3.

pages: 354words: 92,470

Grave New World: The End of Globalization, the Return of History
by
Stephen D. King

The Transatlantic Trade and Investment Partnership faced severe resistance, notably in continental Europe. The European Union was blamed by many voters – not just in the UK, but also in increasing numbers elsewhere in Europe – for all manner of problems, ranging from austerity and unemployment to excessive immigration and an inability to deal with terrorism. Many countries in Asia looked upon the IMF with considerable scepticism given its controversial handling of the Asian financial crisis.
All of this raises a critical question. Can globalization be healed or, instead, are we facing a world in which our international relationships – political, economic, financial – are beating a disorderly retreat?
POPULISTS AND RENEGADES
Some argue that the problem represents no more than a growing divide between the traditional right and left. Yet a simple ‘right/left’ narrative does not work terribly well.

pages: 337words: 86,320

Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are
by
Seth Stephens-Davidowitz

Air Force satellite that circles the earth fourteen times per day.
Why might light at night be a good measure of GDP? Well, in very poor parts of the world, people struggle to pay for electricity. And as a result, when economic conditions are bad, households and villages will dramatically reduce the amount of light they allow themselves at night.
Night light dropped sharply in Indonesia during the 1998 Asian financial crisis. In South Korea, night light increased 72 percent from 1992 to 2008, corresponding to a remarkably strong economic performance over this period. In North Korea, over the same time, night light actually fell, corresponding to a dismal economic performance during this time.
In 1998, in southern Madagascar, a large accumulation of rubies and sapphires was discovered. The town of Ilakaka went from little more than a truck stop to a major trading center.

pages: 1,242words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan
by
Sebastian Mallaby

Greenspan kept up an active tennis and golf schedule during his years as Fed chairman. Pictured here with Treasury Secretary Lloyd Bentsen.
Greenspan began dating Andrea Mitchell of NBC in 1984. Pictured here in 1996, after Mitchell completed the New York Marathon.
Greenspan married Mitchell at a picturesque inn in Virginia. General Colin Powell, hero of the Gulf War, accused him of “sensual exuberance.”
After the successful management of the Asian financial crisis of 1997, and despite Russia’s default in 1998, Time lauded Greenspan, Treasury Secretary Bob Rubin, and Deputy Secretary Lawrence Summers as “The Committee to Save the World.” Even though Greenspan had actually questioned the bailouts, he dominated Time’s cover.
In January 2000, when Greenspan was nominated to his fourth term as Fed chairman by President Clinton, his star was higher than ever.

Not just the one big disaster in 2007, but the many others: the Drexel Burnham bankruptcy, the Bankers Trust scandal, the Kidder Peabody crash, and Long-Term Capital Management’s failure, to name only four. These were among the most advanced firms in these techniques. I haven’t included the collateral damage from Wall Street abuses such as the Orange County bankruptcy, nor the non–Wall Street financial firms like Enron, nor the damage overseas as with the Asian financial crisis, nor the ones that entered more people’s homes like the Internet stock collapse and the mutual fund timing scandal.
First, let me reiterate that the good from financial innovations far exceeds the damage. There were scandals and bankruptcies and disasters before quants came to Wall Street. Taking the good and bad together, the past 30 years have been the most extraordinarily good economic time for the globe in history.

Indeed, there was arguably a Paris Consensus before there was a Washington Consensus (though in many ways it was building on a much earlier Bonn Consensus in favour of free capital markets).64 In London, too, Margaret Thatcher’s government pressed ahead with unilateral capital account liberalization without any prompting from the United States. Rather, it was the Reagan administration that followed Thatcher’s lead.
Jaime Roldós Aguilera of Ecuador . . .
. . . and Omar Torrijos of Panama: Allegedly
victims of the ‘economic hit men’
Stiglitz’s biggest complaint against the IMF is that it responded the wrong way to the Asian financial crisis of 1997, lending a total of $95 billion to countries in difficulty, but attaching Washington Consensus-style conditions (higher interest rates, smaller government deficits) that actually served to worsen the crisis. It is a view that has been partially echoed by, among others, the economist and columnist Paul Krugman.65 There is no doubting the severity of the 1997-8 crisis. In countries such as Indonesia, Malaysia, South Korea and Thailand there was a very severe recession in 1998.

Thus, Geithner was a colleague of Ben Bernanke, but Dick Fuld sat on his board. Just as important, Geithner was a career public servant who did not instinctively recoil from the idea of government intervention. His mentor at the Treasury, Robert Rubin, had championed the American bailout of Mexico, and as undersecretary for international affairs in the late 1990s, Geithner himself was a key player in the government’s response to the pan-Asian financial crisis. Now he argued that the government had to save Bear Stearns or risk a systemic collapse—exactly what Paulson and Bernanke had been fearing. Since the Treasury couldn’t act without Congress’s authority, it had to be the Fed.14
Early Friday morning, the bankers and the bureaucrats reached a consensus. The New York Fed would loan money to Morgan, which would extend a secured line of credit to Bear.

Long Term Capital Management, a hedge fund run by a team of Nobel Prize-winning mathematicians, was unraveling and threatening to take the financial system with it.
Almost immediately after the AHERF bankruptcy filing, MBIA sought to reassure investors by stating that it had $75 million of reserves that would be adequate to absorb the loss. Yet confidence in the bond insurer continued to falter that summer on a combination of AHERF concerns and the Asian financial crisis. For the first time, investors were asking whether MBIA’s triple-A rating was at risk. MBIA’s shares had been sinking all summer, dropping from a high of around $53 in April to $43 by late summer and then tumbling precipitously in early September.
On September 11, 1998, the company held a conference call to set the record straight. “I understand that we have exhausted the phone line capacity of the provider, and I think we have something like over 250 participants on this conference call,” MBIA’s then chairman and chief executive officer (CEO) David Elliott said.

He claimed a patriotic purpose. He told environmentalists he would create a “sustainable” forest industry in Indonesia, based around acacia plantations. I still have the publicity literature from the time. But the plantations only emerged when the forests were all gone. He continued to oversee unprecedented forest destruction.
The wheels nearly came off the deforestation juggernaut after the 1998 Asian financial crisis. This followed huge forest fires in Sumatra and Borneo during the 1997 El Niño drought, which had alerted the world to the parlous state of the Indonesian forests. Both APP and APRIL effectively went bust as global pulp prices collapsed and their activities came under international scrutiny for the first time. They had borrowed huge sums to set up the two Riau mills, and invested heavily in the logging to feed them.

Governments that have a deficit of more than 3 per cent of GDP or public debt exceeding 60 per cent of GDP that is not falling towards that level by at least one-twentieth averaged over three years are subject to further interventions under the Excessive Deficit Procedure. http://www.eurozone.europa.eu/media/304649/st00tscg26_en12.pdf
366 http://europa.eu/rapid/press-release_MEMO-13-457_en.htm
367 http://europa.eu/rapid/press-release_MEMO-13-318_en.htm
368 See, for example, the notes to governments explaining what they must do to comply: http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/coc/code_of_conduct_en.pdf
369 Monitoring worrying imbalances seems like a good idea, but in practice such surveillance tends to be ineffective. It often raises false alarms – hence the joke that economists have predicted ten of the last three recessions. It often fails to warn (or warns too late) about big crises: the IMF missed the 1997–8 Asian financial crisis; the IMF, ECB and the European Commission were all blindsided by the current financial crisis and its eurozone offshoot. Even when risks are correctly identified, political interference and special-interest lobbying often ensure that concerns are watered down or ignored. Last but not least, the resulting policy recommendations may be flawed or not implemented.
370 The European Commission previously monitored imbalances through the EU’s Broad Economic Policy Guidelines.
371 To have any hope of identifying problems in good time, an early-warning system ought to be based on current information and in particular on leading indicators – economic data that tends to provide early indications of future trends.

INTRODUCTION
In recent years, hedge funds and commodity trading advisors (CTAs) have
drawn considerable attention from regulators, investors, academics, and the
general public.1 Much of the attention has focused on the concern that
hedge funds and CTAs exert a disproportionate and destabilizing influence
on financial markets, which can lead to increased price volatility and, in
some cases, financial crises (e.g., Eichengreen and Mathieson 1998). Hedge
fund trading has been blamed for many financial distresses, including the
1992 European Exchange Rate Mechanism crisis, the 1994 Mexican peso
crisis, the 1997 Asian financial crisis, and the 2000 bust in U.S. technology
stock prices. A spectacular example of concerns about hedge funds can be
found in the collapse and subsequent financial bailout of Long-Term
Capital Management (e.g., Edwards 1999). The concerns about hedge fund
and CTA trading extend beyond financial markets to other speculative
markets, such as commodity futures markets. These concerns were nicely
summarized in a meeting between farmers and executives of the Chicago
Board of Trade, where farmers expressed the view that “the funds—
managed commodity investment groups with significant financial and technological resources—may exert undue collective influence on market
direction without regard to real world supply-demand or other economic
factors” (Ross 1999, p. 3).

In 2014 locals still complained about not being consulted about anything, including services and the hospital. “Sometimes we feel as though we are the forgotten island,” says Linda Cash, Christmas Island Tourism Association’s marketing manager.7 Christmas Island and the Cocos Islands were essentially colonies controlled by Australia. In the 1990s a casino brought riches to Christmas Island, but closed due to the Asian financial crisis. Some locals wanted it reopened. Boat arrivals had made at least ten people millionaires on Christmas Island—savvy beneficiaries of the detention business.8
Building commenced in 2006, and the facility was initiated with roughly 800 beds at a cost of $400 million. But the cost increased, and private contractors still had not completed all the work when John Howard was voted out of office in 2007.

Growing economies that have imposed such controls over the last few years include powerhouses such as Brazil, South Korea and India, and China never got rid of them. When Iceland was plunged into economic ruin by the financial collapse, capital controls were fundamental to its recovery. Brazil, for example, imposed a financial transactions tax that went up to 6 per cent, and was hailed by its government as a success because it prevented its exchange rate jumping too quickly. Malaysia survived the 1997 Asian financial crisis better than competitor economies precisely because it had capital controls.
Capital controls monitor the flow of money in and out of a given economy, guarding against asset bubbles and investors’ short-term interests that may be on a collision course with the interests of society as a whole. Capital can surge in, hiking up property prices and exchange rates, and then suddenly withdraw, precipitating a violent crash.

But McClendon had made sure most of it wasn’t due for several years, giving Chesapeake breathing room. Within six months, Chesapeake had spent $800 million to buy a series of companies with about eight hundred billion cubic feet of gas equivalent reserves, as it reinvented itself as a traditional gas exploration company.
The purchases didn’t help much, though. Anemic oil and gas prices kept pressure on Chesapeake shares, as the Asian financial crisis and OPEC’s inability to keep a lid on its members’ production flooded the market with surplus energy. By February 1999, Chesapeake shares traded at a measly seventy cents each, giving the company a market value of only about $75 million.
When McClendon and Ward met with veteran landman Larry Coshow to try to recruit him, Coshow was skeptical: “Man, I’ve been reading y’all’s balance sheet and y’all are broke.”

When countries are willing to sell, trade, or open their territory to foreign governance at such large scale, it is a sign of the shift toward a supply chain world where optimizing economic geography supersedes preserving territorial sovereignty.
All of Southeast Asia is now aggregating according to the same logic. The regional diplomatic grouping called ASEAN was founded four decades ago on the mantra “Prosper thy neighbor,” but Cold War politics prevented any such camaraderie. Since the region’s hammering in the 1997–98 Asian financial crisis, however, the ASEAN Economic Community has risen to become the world’s fifth-largest economic area with a GDP of over $2 trillion (behind the EU, the United States, China, and Japan) and attracts more FDI than China due to its youthful 650 million people. Even as it competes with China, ASEAN helps Asia strengthen its grip on global supply chains.1 From 1990 to 2013, Asia’s share of global manufacturing rose from 25 percent to 50 percent and will rise even further in the coming decade.

With that aim in mind, he and his partners are sponsoring the World Congress on Art Deco in 2015 to spotlight and preserve what is left of Art Deco buildings in Shanghai. It is a gamble to convince the government there is room in Shanghai for the historic Bund as well as Disneyland.
All of this maneuvering has been done against the backdrop of the rapid buildup of tourism that exploded in 2000 when domestic tourism was unleashed and foreigners discovered China’s strength, especially after the Asian financial crisis.
The Golden Weeks announcement of guaranteed vacation “put it all together,” said Cranley. “Now we have to deal with our success. We’re all experimenting to find the sweet spot where tourism is working for China and where Chinese tourists feel they are free as tourists.”
Bill and I met many of those Chinese tourists at the site of the First National Congress of the Chinese Communist Party, when the party was officially founded, a critical milestone on the road to revolution.

He was forced to take a year off just as Garantia reached its peak. In a sign of its clout, the bank managed to bring Margaret Thatcher to Brazil for a meeting with local businessmen in 1994. And that year Garantia cleared a billion dollars in profit. Pioneers of risky American-style financial bets, its traders got cocky. They sold tons of insurance on Brazilian government bonds without properly hedging their bets, and when the Asian financial crisis exploded in 1997, sending interest rates soaring in emerging markets, Garantia lost hundreds of millions of dollars. Telles would later explain the disaster by blaming Lemann’s absence and the fact that he himself, along with Sicupira, were busy with their outside takeovers. Whatever the truth, Lemann and his partners decided to sell the bank to Credit Suisse. They got $675 million, a good deal less than they would have a couple of years earlier.

The hindsight-informed analysis has been repeated many times: American and European bankers played round after round of a highly lucrative game—lending cash to consumers and homebuyers, moving the debts and risk off their books through securitization and credit derivatives, then lending again—until households were drowning in borrowing costs and the balance sheets of big financial institutions were awash with hundreds of billions in bad debts that would never be paid off. The integration of emerging economies into global capital markets amplified the risk: China was generating lots of cash, saw few investment opportunities in Asia after the 1997 Asian financial crisis, and so plowed it into the US economy by buying US government debt. The foreign cash infusion helped dampen domestic interest rates and kept the game going longer.
We did not clearly understand how fragile these activities made the global financial system, and we broke it. Households that took out big mortgages in the belief that housing prices would never go down turned out to be wrong.

Alassane Ouattara, an Ivory Coast economist who became a deputy IMF managing director, argued powerfully inside the Fund for corruption to be
considered, and finally, in 1996, World Bank president James Wolfensohn
marked a turning point. “Let us not mince words,” he said. “We need to
deal with the cancer of corruption.”5 He had placed the issue squarely on
the development agenda for the first time at a multilateral institution. Peter
Eigen, chairman of Transparency International, calls the World Bank “the
most powerful force against corruption in the world nowadays.”6
The 1997 Asian financial crisis had rammed home the idea that economic liberalization is not enough if it is not accompanied by good governance. Government does not need sweeping away, it needs fixing. The
worst disasters in postindependence Angola—civil war, hyperinflation, and
corruption—came not from overly strong government, but from government weakness—above all, weak military control and a fragmented economic system with out-of-control spending.

The world has about twenty economically productive economies,
with a total population of around 800 million, of which 300 million
live in North America, a slightly larger number in Western Europe,
and the remainder in Asia and Australia. It is fashionable to adopt
one or other of these rich countries as the current exemplar of
success-Japan took that role in the 1980s. As the Japanese sun set
after 1989, the performance of the German economy was applauded,
and then as that country struggled with the burden of reunification,
attention turned to the Asian tigers. After the 1997 Asian financial
crisis, the United States assumed the role of the most admired economy for economic commentary and business gurus.
But, as I shall describe in chapter 4, differences in performance
among these twenty countries are small relative to the differences
between these twenty and the rest of the world. The division between
rich and poor states is sharp and has been enduring. China is still
Culture and Prosperity
{17}
extremely poor, but the extraordinary achievements of Chinese people outside China, and increasingly within China, may change this
balance of the world economy in the twenty-first century.

(He is just one of many experts who worry about the market-distorting effects of the Fed’s unprecedented program of asset buying and low interest rates, which reached an apex in the wake of the 2008 crisis.) “Easy money monetary policy is the best reward in the world for Wall Street. After all, it’s mainly the rich who benefit from a rising stock market.”58
Although markets boomed under Greenspan, they also went bust more than ever before. The crash of 1987, the S&L crisis of 1989, the Mexican peso collapse of 1994, the Asian financial crisis of 1997, the larger emerging-market crisis of 1998, and the dot-com boom and bust all happened on his watch. Each time the economy faltered as a result, Greenspan would lower rates to boost lending. (He used this tactic so reliably, in fact, that Wall Street bankers began calling it the “Greenspan put”—a caustic term that encapsulated their belief that the Fed would bail them out no matter what.)

That officer: Idi Amin, the future tyrant.2
While the family did return to Canada—Barton spent the first eleven years of his McKinsey career in the Toronto office—the Ugandan experience had given him wanderlust, and Barton jumped at the chance to move first to Sydney, Australia, and then Seoul, South Korea, when the firm was having trouble finding partners to staff that office. Almost as soon as he arrived, the Asian financial crisis hit, dealing a severe blow to the Korean banking system. For Barton, though, the crisis was a bit of a godsend: With thirty-four of the country’s banks insolvent, his first big project was to help Korea restructure its entire banking system. “The public sector work was exciting,” he recalled. “And then when the entire region was on the move, it was totally enthralling.”3 Barton later ran the firm’s Asian operations out of its Shanghai office before moving to London upon his election as managing director.

In fact, Japanese rivers are short and not especially mighty—a big reason why the country had chosen to emphasize nuclear power. By looking through Japanese product catalogs, Kim had discovered the installment plan. “How long have they been using this method of payments?” he asked his visitors from Japan. “Even shoddy products are being sold on the installment plan. It appears that the installment plan is due to slow sales.”
His characterizations of South Korea, which at the time was suffering from a severe Asian financial crisis that had begun in 1997, were full of exaggeration and misrepresentation—perhaps simply his wishful thinking: “The real ruler of South Korea is the United States. Today South Korea is in turmoil politically and economically. Seoul officials are trying to restore economic stability but I doubt they will make it.” Of course, following that economic rough patch, they did make it. Revealing his faulty perception, Kim observed that, after having prospered “for about ten years starting in 1988,” the South Korean devils were “broke and dirt poor.”

…

(Only later would it become clear just how accurate Pyongyang had been in saying this was Kim Dae-jung’s show.)
News of the summit announcement suggested that Kim Jong-il had looked over the possibilities for fixing his busted economy and realized that it could hardly be done without the participation of the estranged but filthy-rich Koreans living south of the Demilitarized Zone—-who by that time had shown their staying power by weathering the Asian financial crisis. Hyundai, with its tour cruises to Mount Kumgang, had given Pyongyang a tantalizing sample of just how much help the South could provide if relations improved. And the basic strategy embodied in both Kim Dae-jung’s sunshine policy and the South Korean–American-Japanese “Perry process,” named after the former defense secretary, was to combine aid with credible assurances of domestic non-interference and hook Pyongyang on peaceful coexistence.

In late 1997, the so-called Asian flu became a pandemic, and after Thailand’s currency crashed,
setting off a financial chain reaction, Cassano began looking for some safe-haven investments. It
was during that search that he met with some bankers from JP Morgan who were pitching a new
kind of credit derivative product called the broad index secured trust offering—an unwieldy
name—that was known by its more felicitous acronym, BISTRO. With banks and the rest of the
world economy taking hits in the Asian financial crisis, JP Morgan was looking for a way to
reduce its risk from bad loans.
With BISTROs, a bank took a basket of hundreds of corporate loans on its books, calculated the
risk of the loans defaulting, and then tried to minimize its exposure by creating a special-purpose
vehicle and selling slices of it to investors. It was a seamless, if ominous, strategy. These bond-like
investments were called insurance: JP Morgan was protected from the risk of the loans going bad,
and investors were paid premiums for taking on the risk.

W. Jones. Julian Robertson allowed me to read all his monthly letters to investors, spanning the twenty-year life of his Tiger fund; spiced with observations about fur-wearing men in Aspen and the difficulty of lowering one’s body temperature after a tennis match in Hong Kong, the two fat binders of Roberston’s letters were a book in themselves. Rodney Jones kept almost daily notes of the Asian financial crisis, allowing me to reconstruct the Soros funds’ role in Thailand, Indonesia, and South Korea in more detail than would have been possible based on interviews alone. Paul Tudor Jones wrote nocturnal e-mails that illustrated his thought process brilliantly. John Paulson’s memo to his investors laid out the logic of betting against the credit bubble so clearly that it makes you wonder how anyone could have been on the other side.

The
-step ahead forecast of the covariance between a1t and a2t is ρ̂21 [σ11,h (
)σ22,h (
)]0.5 , where
ρ̂21 is the estimate of ρ21 and σii,h (
) are the elements of Ξ∗h (
).
Example 9.1. As an illustration, consider the daily log returns of the stock
market indexes for Hong Kong and Japan from January 1, 1996 to October 16, 1997
for 469 observations. The indexes are dollar denominated and the returns are in percentages. We select the sample period to avoid the effect of Asian financial crisis,
-8
-4
log-rtn
0 2 4 6
(a) Hong Kong
0
100
200
300
400
300
400
days
-4
-2
log-rtn
0
2
4
(b) Japan
0
100
200
days
Figure 9.1. Time plots of daily log returns in percentages of stock market indexes for Hong
Kong and Japan from January 1, 1996 to October 16, 1997: (a) the Hong Kong market, and
(b) the Japanese market.
366
MULTIVARIATE VOLATILITY MODELS
which hit the Hong Kong Market on October 17, 1997.

Notwithstanding the clear limits to the radius of the national identity that the Indonesian state has been able to impose, the government has achieved a remarkable degree of national integration for a region that was not remotely a single nation one hundred years earlier. Indeed, Indonesian identity by the 1990s had become sufficiently secure that when the country as a whole transitioned to democracy after the Asian financial crisis in the late 1990s, it was able to permit a substantial devolution of power to its provinces and localities without fear of further fragmentation. Indonesia remains a highly fractured country, as communal violence against the Chinese and Christian communities and other minorities continues. Levels of corruption remain high as well. But all success is relative: given the kind of ethnic, religious, and regional fractionalization with which the country started, its nation-building success is quite remarkable.